While you may at times hear the terms credit score and FICO score used interchangeably, there are actually some key distinctions between the two. Knowing how and why a FICO score differs from other credit scores is important as, in most cases, the FICO score is what will be used to help you or your business secure financial support.
What is a credit score?
A credit score is a measure of an individual, group or organization’s credit risk, used by lenders to indicate how likely a borrower is to repay a loan. Credit scores are separate from a credit rating, which is used to determine the creditworthiness of a business or government. Credit scores are used for individuals and for small businesses.
Credit reports and credit bureaus
There are three major credit bureaus in the US: Equifax, Experian, and TransUnion. Each of these bureaus assess people’s financial history and how they manage credit, and develop what are called credit reports. Credit reports are a record of your financial activity – outlining credit management, loans, bankruptcies, and more.
Each bureau formats and structures their credit reports differently, and different credit scores use different credit reports to gather information, which is why your credit scores may differ depending on who you get them from.
A credit score is used to create a more efficient process for lenders assessing someone’s credit history without having to analyze each credit report.
What is a FICO credit score?
FICO is a company that was established in 1956 by engineer Bill Fair and mathematician Earl Isaac (hence the original name, Fair, Isaac and Company), and went public in 1986. Three years later in 1989, FICO established a scoring model to calculate credit scores, which has since become the standard in the US. The scoring model has been updated over time, with the latest scoring model being FICO Score 9 (while FICO Score 8 is still currently the most commonly used).
There are several different versions of the FICO score to serve different lenders in different industries, including FICO Bankcard Score for securing credit cards, FICO Auto Score 8 for automobile financing. The standard FICO Score is the most widely used, and is what will likely be used for mortgages and general loans.
With each different FICO score, the foundations remain the same, but attributes are weighed up differently to recognize and cater to risk behaviors specific to each industry.
What is the difference between FICO score and credit score?
A FICO score is a specific kind of credit score – the most commonly used by lenders in the United States. The difference between FICO score and credit scores from other providers comes from the scoring models and the way different factors are weighed up.
FICO will use its unique scoring models against credit reports from all of the major bureaus. Alongside credit reports, FICO scores are based on factors like credit history, credit mix, credit utilization ratio, and payment history, with a tried and tested algorithm that calculates risk.
The reason FICO scores are so important is simply because they’re the most trusted credit score in the country. Lenders understand that FICO’s formula and scoring models are reliable, trustworthy and accurate. Rather than use different formulas that offer different results, most lenders opt to use FICO scores to streamline the process.
What is a FICO score used for?
Just like any other credit score, a FICO score is used by lenders to determine your creditworthiness.
A bad credit score indicates to lenders that you’d be a risky or unreliable borrower. This may prevent you from securing a loan, or might impact how much you can borrow, how much time you have to repay it, or what interest rate it comes with.
What is a good FICO score?
A FICO score is a three-digit number between generally ranging from 300 to 850 that represents your credit. While different lenders and different industries may look at a number of factors when deciding creditworthiness, FICO scores are generally evaluated in the following segments:
<580: Poor credit
670-739: Good credit
740-799: Very good credit
How to improve your FICO score
There are a few things you need to do to maintain a favorable credit score. If you’ve never used credit before, or if you have an existing low credit score, you can build your credit up by responsibly using a credit card, secured credit card, or pursuing a credit-builder loan.
To improve your credit, you must make sure you’re always paying your bills in full and on time. This is the most important factor. Even one late payment can be hugely detrimental to your credit score. One way to ensure you’re always on time is to set up automatic bill payments.
You can reduce your credit utilization ratio by spending less, using a personal loan to pay off credit cards, or requesting that your credit limit be raised on current cards. You should also avoid closing credit cards, as this will increase your credit utilization ratio. Even if you no longer use them, it’s best to keep your credit cards open.
Without a good credit score, you might struggle to secure an affordable mortgage. It can also impact your likelihood for getting jobs, or for renting property. If you manage to secure a loan despite a low credit score, you can expect hefty interest rates.
As mentioned, a FICO score is just one of many types of credit scores available in the US. While 90% of lenders use FICO scores to assess credit, other credit scores include the emerging VantageScore as well as proprietary scores from the major credit bureaus themselves, like Experian’s PLUS Score and the Equifax Credit Score.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.