Financial Fact: What is the Difference Between Your Credit Score and FICO Score

Most people  know credit scores are important for obtaining credit cards or securing loans and mortgages with good interest rates, yet many are confused as to what they actually mean especially when the words FICO score are thrown into the mix.

Both credit scores and FICO scores are a measurement to give lenders an idea of what they are risking by lending money to someone. It is obtained from credit reports, which are based on credit history with the three main credit bureaus: Equifax, Experian and TransUnion. Each company calculates credit scores differently using their own complex models. Not all lenders report to all companies and your score will vary among the three.  

These three major players also joined forces in 2006 and formed Vantage Score, which is supposed to be a more predictive scoring model that is easy to understand and apply.

There is no one true score; however, the most widely used credit score by 90% of the top leaders in the United States is FICO (Fair Isaac Corporation), which began scoring in 1989. To complicate matters further, there are several variations of FICO Scores. The ones used most often by lenders are FICO 04 and FICO 98. Consumers can check their FICO 04 number annually for a fee, but they cannot access FICO 98. Some banks allow you to check FICO 08 for free through your online account or app.

It should be noted, the top mortgage lenders use FICO as an industry standard. The better your score, the lower the interest rate.

Regardless of the company, creditworthiness scores are calculated using payment history, amounts owed, length of credit history, credit mix and any new credit accounts recently applied for.  All five companies will have similar scores, but they may vary as much as 50 points giving you a good score with one company and possibly a fair score with another. This is because each of them weighs the categories differently. They all place a lot of weight, up to 35% of your score, on payment history and paying debts on time. Tax liens and Civil Court judgements also are figured in but not as highly with Vantage as with FICO.

Credit scores don’t just affect your ability to get a credit card or interest rate on a mortgage, they also affect how much your deposit for utilities will be, if you can lease a car or rent an apartment.

So, what is a good number? The FICO scale is as follows: 800 and above – exceptional; 740-799 – very good, 670-739 – good, 580-669 – fair and less than 580 poor.  Vantage Scores are a bit more generous: 781-850 – excellent, 661-780 – good, 601-660 – fair, 500-600 – poor and 300-499 – very poor.

There are things you can do to raise your credit score. Pay bills on time. Lower your credit utilization ratio by lowering the percentage of your credit limit you are using. It is recommended you use no more than 30%. Several ways to achieve this include paying more than the minimum amount due, asking for credit limit increases, and thinking twice before closing a card. Also monitor your credit to confirm all activity is yours and not someone stealing your identity. Know the difference between hard and soft inquiries. Soft inquiries do not impact scores. Soft inquiries include reviews of your credit file and existing accounts as well as pre-approvals, opening a bank account and getting an insurance quote.  Hard inquiries do affect your score. These actions include applying for credit cards, requesting credit limit increases, and how recently and how often you applied for loans and other lines of credit.

For more information on how to raise a credit score, consult with a financial planner.