What Is A FICO Score And Why Does It Rule Our Lives?



What Is A FICO Score And Why Does It Rule Our Lives?

A small three-digit number developed by Bill Fair and Earl Isaac in 1956, the Fair Isaac Company (FICO), is based on the information in your credit reports. When borrowing money, be aware of your FICO score based on information in your credit reports. FICO was developed to provide an industry standard for determining creditworthiness that was fair to industry and consumers.

FICO scores are used by over 90% of lenders to make lending decisions. These three-digit scores are the industry standards for making fair and accurate decisions about creditworthiness.

FICO helps lenders determine how likely you are to repay a loan. Your ability to pay also represents how much you can borrow, how many months you have to repay, and the interest rate or the cost of borrowing. A FICO score summarizes your credit report, and a FICO score is determined by the accounts you have established. Lenders report credit cards, auto loans, personal loans, medical bills, and mortgage loans, and some form of business loans. Reporting includes the date you opened the account, your credit limit or loan amount, the account balance, and payment history

With a FICO score in hand, lenders can determine much quicker and make smarter decisions about who gets a loan. In addition, a good FICO score will save you thousands of dollars in interest and fees since lenders are more likely to extend credit with lower interest rates to you if you are less of a risk.

When seeking a loan, which of the credit bureaus is most important? There are three major credit bureaus, and the only credit score that matters to you should be the credit bureau your lender is currently watching. Ask your lender which credit bureau file they are using to determine your creditworthiness. They will tell you.

Why Are FICO Scores from the Three Major Bureaus Different?

The three major credit bureaus you need to be aware of are Equifax, Experian, and Transunion. Your score is different based on the information provided to each bureau. Credit bureaus may not receive all of the same information about your credit accounts, which makes your score different. Credit scores generally range from 300 to 850, but many other versions are looked at – from base to industry-specific scores. Different scoring patterns make it confusing to know which score you are being evaluated on during the lending process.

Check with your lender to find out what credit bureau they are using. Be aware that a specific version will differ from the score you just checked with a free credit checking bureau when your credit is pulled.

There are several reasons why your score differs from bureau to bureau.

  1. There are different models for scoring your credit. For example, lenders use FICO or VantageScore. Both methods evaluate the same major factors of your credit history. For example, payment history and utilization rate, but they use their formulas to weigh each factor.
  2. There are different credit score versions used for industry-specific scores. FICO Score 8 or Vantage Score 3.0 show lenders that you will probably repay credit obligations. Additionally, an industry-specific score like the FICO Auto Score 9 is a good level for an auto loan.
  3. Each credit bureau may not receive the same information about credit accounts. Lenders are not required to report to all or any of the bureaus. Most do, but there is no guarantee that the information is the same across the board. The way your creditors’ report creates potential differences in scores.
  4. Errors on or credit reports can reflect differences between the bureaus. Therefore, when checking credit, look at all three bureaus and dispute errors on your credit report as soon as possible.

There is no direct answer to which credit score is most important. Lenders have their favorites, and that is the score they will use. When determining what credit bureau to concentrate on, consider the reason you are checking your credit score. If you access your score to track your finances, a widely used base score like FICO Score 8 is good.

However, if you are planning to make a specific purchase, review industry-specific credit scores. FICO lists the specific scores used for different financial products. For example, FICO Auto Scores 8 are used if you want to finance a car, and it is good to check FICO Scores 2, 5, and 4 if you purchase a home.

What Credit Bureau does a Home Mortgage Lender Use?

When applying for a mortgage, the lender may use FICO Score 2 (Experian), FICO Score 4 (Equifax), or FICO Score 5 (TransUnion). Your FICO score is tailored to the scoring model that best predicts your creditworthiness, and each lender pulls all three bureaus. However, they usually use the score in the median range. Mortgage lenders do not use the highest or the lowest but a median score.

When evaluated for a mortgage with another person, each person’s FICO 2, 4, and 5 scores are pulled. Then, the mortgager identifies the median score for both parties and uses the lowest of the final two to make a credit decision. The scoring system, FICO 8, is generally the formula used.

What Credit Bureaus do Auto Lenders Use?

Most auto loans are checked through Experian and Equifax. These bureaus offer specialized auto lending solutions and receive a good portion of their revenue from the auto industry. In addition, most car dealers use the FICO Score 8 formula system. FICO Score 8 is the most widely used and takes into consideration your three credit reports.

FICO Score 8 model breaks out as:

  • Payment history or 35% of your credit score is knowing whether or not you pay your credit cards on time.
  • The amount you use is 30% of your score. How much you owe on accounts and the percentage of the available credit you are using.
  • Length of credit history is 15% of the score. The length of your account is the average age of all your accounts and how long it has been since you used certain accounts.
  • The credit mix is 10% of the score. For example, do you have credit card accounts, mortgage loans, and auto loans? A mix of different accounts is a great indicator and will rank you higher.
  • New credit is 10% of your score. New credit inquiries and recently opened accounts influence your FICO scores.
  • FICO Score 8 is a bit more forgiving than older versions. It gives you a break if you are one-time late on a payment but punishes numerous late payments. FICO Score 8 ignores collection actions that are less than $100, and FICO Score 8 looks at your credit card usage. Keep your utilization rate below 30% to have a good score.

FICO Score 9 model is:

  • Paid collection accounts do not matter as much. However, if you paid off a collection account in full, a FICO Score 9 does not rate this account.
  • Medical collections do not really matter. New credit scoring models deemphasize the impact of unpaid medical collections
  • Rental pay matters. FICO Score 9 cares if you pay rent on time and your scores use rental payment history as a factor.

Vantage Scores

VantageScore formulas use data from your credit history, including payment history, the average length of time, different types of credit, credit usage, and inquiries. Vantage Score 4.0 also uses trend data that looks at behavior patterns rather than just a snapshot in time. So, for example, when consumers are paying down the debt over time, a Vantage Score reflects positively on your credit score.

Vantage Score 4.0 places less value on medical accounts and recognizes that medical debts are often the results of delayed payment by insurers rather than the consumer’s failure to pay.

VantageScores can vary just like FICO scores. Your credit is based on the information received from creditors, and the data at each credit reporting bureau is slightly different due to the timing of credit reporting. There are four versions of the VantageScore formula, and credit scores provided use different versions.

One credit scoring model, FICO or Vantage, may factor medical collections, while another score or bureau might not care about medical collections that are six months or newer. Also, be aware that you may get credit for years of timely rent payments. Read and look at what goes on behind the scenes to position yourself to get a good loan.

Are free Credit Scores Accurate?

There are companies offering to provide you with a credit score and report for free. But, how accurate and reliable is this information? For example, is Credit Karma a popular place to receive credit scores, giving you the same information a lender will see if you are applying for a mortgage or car loan?

Credit Karma accesses your information from TransUnion and Equifax. You will need to go to Experian to find out your number at that bureau. Credit Karma does not gather information from creditors; it only gives you a credit bureaus’ score. But what Credit Karma can do is give you advice on making the most of your credit information.

Different lenders use different scores, but each score is the same. You are rated on core items, and if you have a “good” credit score on one model, you most likely have a good credit rating on other models. Using a credit service like Credit Karma can give you a picture of your credit and how best to use this information. In addition, Credit Karma and other like-minded credit informing companies may offer you ways to increase or improve your credit. These services may not be as free as advertised, but they will help you.