If you’ve ever attempted to get a loan or applied for a credit card, you’ve likely heard the term “FICO score” mentioned on more than one occasion.
However, if you’re just establishing your credit, or if you’ve never really paid attention to your credit in the past, understanding what the FICO is and what it means can be challenging.
This article covers everything about FICO scores. It includes what they are, how they are calculated, the different types of FICO scores, and what they are used for. We also cover some other, less commonly used types of consumer credit scores and how they compare to the FICO.
What is a FICO score?
FICO scores are used credit scores by over 90% of lenders and credit card issuers to determine whether to approve you for a loan or a credit card.
The Fair Isaac Corporation gets information from all three credit reporting agencies (Experian, Equifax, and TransUnion). They use the information in your credit file to calculate three different FICO scores – one for each credit bureau.
As the information in each credit report changes, your FICO score will change as well. It can change month-by-month or even day-by-day as your creditors report new activity on your account.
Multiple Versions of FICO Scores
FICO regularly updates the algorithm they use to calculate your FICO scores. When they do this, they update to a new ‘version’ of the FICO. Currently, the newest version is FICO 9. It has several changes to how certain items are factored into your credit score. In particular:
- Paid collections no longer have a negative impact.
- Medical collection accounts have less of a negative impact.
- Rental history, when reported by your landlord, is now factored in. This change can help renters to establish a positive credit history even if they don’t have other forms of credit.
What are the types of FICO scores?
Beyond the regular changes that happen as their credit scoring model is updated, there are also several types of FICO scores. Each one is designed to help lenders determine specific kinds of credit risk. The most common types are:
- Auto Score – determines how likely you are to default on an auto loan or lease
- Mortgage Score – determines how likely you are to default on a mortgage loan
- Credit Card Score – determines how likely you are to default on a credit card or store charge card account
- Installment Loan Score – determines how likely you are to default on a large installment loan
- Personal Finance Score – determines how likely you are to default on a smaller installment loan
For all of these different types of credit scores, a special set of FICO scores is used, which is not on the same scale as the general FICO score.
In addition, these scores assess the likelihood that you’ll default in the next two years, but only for their specific focus. For example, an Auto FICO score will only measure the risk of your default on your auto loan, not your mortgage.
Multiple Versions of Industry-Specific FICO Scores
To further complicate matters, FICO regularly updates these special industry-specific credit scores to be more accurate. Like the general FICO score, there are multiple versions of each industry-specific FICO score.
What this means is that a typical person doesn’t just have one or two FICO scores. Instead, everyone has dozens of FICO scores.
This is one of the many reasons why one lender may decline a credit application while another approves the same application. Different versions of the same FICO score or the same type of score taken from different credit bureaus will almost always be different.
How are FICO scores calculated?
Fortunately, standard FICO scores are calculated using a fairly consistent method from one version to the next. The general breakdown of how your standard FICO scores are calculated is as follows:
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Credit Mix – 10%
As you can see, the vast majority of it boils down to payment history, how much debt you carry, and how long you’ve had credit in your name.
While the industry-specific scores will weight things a bit differently, these main factors will still be important in calculating your FICO scores.
Factors That Do NOT Impact Your FICO Scores
There are also several factors that Fair Isaac Corporation says are never part of the calculations that determine your FICO score. These items are:
Lenders may factor in your income, what kind of job you have, or other outside circumstances when it comes to approving your application for credit. However, FICO does not take these into account when calculating your credit score.
How do I check my FICO score?
If you want to know what your FICO score is, you can check it before applying for a loan to have peace of mind. The simplest way to get access to your FICO score is to order it. Unlike your consumer credit reports, you will have to pay for it, either through a third-party service or directly through Fair Isaac Corporation.
We recommend going directly through FICO if you need a full overview of the various credit scores. However, if you decide to go the third-party route, make certain the credit score you are purchasing is an authentic FICO score.
FICO Score vs. VantageScore
VantageScore is a credit score created by the three major credit bureaus (Experian, Equifax and TransUnion) to compete with FICO.
It has many similarities, including using the same score range (300 to 850) and using past payment information to predict the risk of future defaults. However, there are a few key differences, including:
- The VantageScore does not weigh paid collection accounts negatively. The latest version of the FICO also reduces the impact of paid collections. However, the new version of FICO is not widely used at the time of this writing.
- The VantageScore counts late mortgage payments against your credit more than other types of delinquent payments.
- If you are hit by a natural disaster, the VantageScore takes that into consideration
- You have only 14 days to rate shop with a VantageScore – with a FICO, you may have up to 45 days to find the best loan.
Given that roughly 90% of lenders are still using FICO, VantageScore isn’t a major player yet. If you need to know for certain whether a lender will approve your credit application, check your FICO scores. These are the ones most likely to be used by any creditor you choose.
FICO vs. TransRisk
TransRisk credit scores are provided by TransUnion only, and specifically through Credit Karma. The algorithm of how the credit score is calculated and what factors into improving the credit scores isn’t well-known.
Aside from being freely available to consumers via the Credit Karma website, there is not much benefit to the TransRisk score.
It is not used by many lenders or creditors, and therefore knowing your credit score isn’t useful for getting approved. However, it can help you track the general improvement of your credit over time, so it can be useful as a monitoring aid if nothing else.
What’s a good FICO score?
What counts as a “good credit score” depends on what you want to do with your credit. Do you want to be able to get a new home? A $25,000-limit credit card? A $5000 personal loan?
For each of these different scenarios, a different FICO score range applies when talking about a good score versus a fair one.
That being said, there are some rough and ready guidelines for determining what FICO score you need to get approved for specific types of credit:
- Mortgage – 640 is the minimum to qualify, 720+ gives the best rates
- Car loan – 620 is basic rate, 740+ gives the best rates
- Credit cards with low interest rates – 640 is the minimum, 720+ gives the best rates
Bear in mind that different lenders may pull your FICO score from more than one credit bureau. They may also use more than one version of the FICO to make their lending decisions alongside your personal financial history.
For those reasons, it is useful to shop around for the best rates, particularly when you know your credit scores are close to prime, or super-prime rates.
How can I improve my FICO score?
On the other hand, if your FICO scores are too low to qualify for the rates you deserve, there are several things you can do to boost your scores:
- Reduce your credit card balances – Carrying a high balance can signal significant risk of default and lower your credit scores all around.
- Make your payments on time consistently – a six-month history of on-time payments will raise your credit scores by several points
- Remove negative credit accounts from your credit report – are there late payments that were actually on time? Multiple collection accounts for the same debt? Debt listed as higher than your records indicate? All of these are errors on your credit report hurt your credit score, and getting them removed can help you to qualify for credit sooner rather than later.
Because there are so many types of FICO scores, don’t be discouraged if the credit scores you’re seeing aren’t the same as the ones you see in the bank or the auto dealership – just be prepared to keep working at it, and building your credit over time.