You may have heard of a FICO score and perhaps even know your own number. However, what may not be immediately apparent is that it represents just one of the credit scores assigned to you. While “FICO” and “credit score” may sound interchangeable, there exists a distinction worth noting, particularly if your credit history is less than ideal. It is advisable to be aware of all your scores before seeking credit.
Key Distinctions between a FICO Score and Credit Score:
FICO, an acronym for Fair Isaac Corporation, is the pioneer in offering credit-risk scores and stands as the most widely used type. Employing a specific formula, FICO assesses and assigns your creditworthiness based on the following factors in descending order of significance:
- Payment history
- Outstanding balances
- Age of credit
- New credit
- Credit mix
Individuals are assigned a numerical value within the FICO score range of 300 to 850, with a higher score indicating superior credit. FICO further diversifies its scores based on various loan types, such as the FICO Mortgage score, FICO Auto Score, and more. Consequently, it is possible to have numerous FICO scores, each associated with a distinct numerical value.
Moreover, the FICO credit score underwent changes in 2020 with the introduction of the UltraFICO score. This novel score brings positive news for those initiating their credit history or seeking credit repair, incorporating deposit account activity into the score calculation while maintaining the same numerical scale.
An alternative credit score is the VantageScore, established in 2006 by the major credit bureaus: Equifax, Experian, and TransUnion. Utilizing the same numerical range, the VantageScore is generated with just one month of credit history, rendering it advantageous for new credit users. The VantageScore employs a distinct formula, prioritizing the following factors in order of importance:
- Credit usage, balance, and available credit
- Credit mix
- Payment history
- Age of credit
- New credit
What are FICO or Credit Scores Used For?
When seeking financing, such as a mortgage, auto loan, or personal loan, lenders scrutinize your credit score to evaluate your creditworthiness and assess the associated risk. Although the numerical range remains consistent, FICO and VantageScore employ distinct categories.
FICO credit scores are categorized into the following five tiers:
- Exceptional: 800 and above
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: Below 580
On the other hand, VantageScore levels are segmented into four tiers:
- Superprime: 781-850
- Prime: 661-780
- Near prime: 601-660
- Subprime: 300-600
While FICO asserts that it is utilized by 90 percent of top lenders in making loan decisions, VantageScore contends that its usage is on the rise. According to a recent study by VantageScore, between July 2018 and June 2019, over 2,500 lenders utilized 12.3 billion of its credit scores, indicating a 20 percent increase in usage.
Numerous credit card issuers offer complimentary access to your FICO score on your statement or through their customer website. Additionally, several banks, including JP Morgan Chase and Capital One, provide free access to your VantageScore via their online banking platforms.
Your credit score is derived from your credit report, and the Fair Credit Reporting Act mandates that each of the three credit bureaus furnish you with a complimentary copy annually. Regularly reviewing your credit report is essential, as one in five consumer reports contains errors that could adversely impact your score and hinder your ability to secure financing. Should you identify inaccuracies, it is possible to dispute them with the respective credit-reporting agency.
In the event of a low credit score, proactive measures can be taken to enhance it. Strategies include reducing debt to improve credit usage information, ensuring timely payment of bills, requesting a higher credit limit to elevate thresholds, and abstaining from acquiring new types of credit that might result in a hard inquiry on your credit report. Additionally, fostering a more diverse credit mix by incorporating both revolving and installment loans can contribute positively to your credit profile.
By comprehending and managing your distinct credit scores, you can assert control over them. This understanding instills confidence when contemplating borrowing in your financial future.