What is a FICO score? FICO Score vs Credit Score
If you are unsure what a FICO score is, and what’s the difference between a FICO score vs credit score, you are not alone. Having the answers to these questions and having a working knowledge of your FICO score and how to manage it could significantly impact your financial health.
What is a FICO Score?
A FICO score is essentially a three-digit number that lenders rely on when determining whether someone possesses enough creditworthiness to qualify for credit cards and a wide variety of loan products. Created by engineer Bill Fair and mathematician Earl Isaac in 1956, the lending tool’s name is an acronym for the Fair, Isaac, and Company.
After developing the FICO method, Fair and Isaac sold the system two years later. The FICO score was introduced in 1989 as a way to evenly measure borrowing risk across the loan-approval process. Using this impartial math- and fact-based scoring system, lending institutions finally enjoyed an unbiased and consistent framework for their decision-making process. Now the industry standard, the FICO score effectively ended discriminatory practices and ushered in a level playing field for consumers.
Today, the three digits assigned to consumers powerfully influence borrowing power, interest rates, and terms. Millions of people enjoy access to loans and lines of credit to purchase homes, automobiles, pay medical expenses, take once-in-a-lifetime family vacations, and qualify for credit cards, based on FICO scores to a large degree.
A high FICO score, in conjunction with other financial measures, helps members of the community take advantage of low-interest borrowing and favorable terms. By that same token, a subpar FICO score limits consumer options and often results in higher interest rates and monthly loan payments. Although a poor credit score can be daunting, many local credit unions remain open to working with community members to find financial solutions and offer guidance to help raise credit scores.
That’s largely because credit unions are not-for-profit institutions. Many operate with a goal of working diligently to provide borrowing pathways for working families, especially those with less-than-perfect credit. Not having to post high profits for investors usually gives credit unions some degree of FICO score flexibility. Although these loan professionals consider wide-reaching factors when approving loans and credit card applications, your FICO score plays a central role.
What is the FICO Score Range?
The three major credit bureaus usually assign people a score between 300 and 850. The FICO score system also offers industry-specific ratings that range from 250 to 900. Consumers and even lenders tend to simplify FICO scores based on loosely defined ranges and assign values from poor to excellent.
Knowing your FICO score range helps you understand what types of loan programs, products, and credit cards to consider from a practical borrowing perspective. Knowing that number can also motivate consumers to build their credit and improve them. That being said, the following ranges and values are generally adopted by loan professionals.
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Excellent: 800 to 850
To better understand how a FICO score impacts your quality of life, consider these numbers in terms of applying for a mortgage or getting pre-approved for an automobile loan. Low-income families living in rural areas generally need a score of 640 or greater to gain approval for a USDA mortgage secured by the federal government. The Federal Housing Administration backs the mortgages of qualified borrowers with a FICO score of 580 or greater. However, community members usually need a fair-to-good FICO score of 620 or higher to qualify for a non-government-supported conventional home loan. Many of these loan products offer low-interest and favorable terms.
The essential point is not necessarily whether you can qualify for a home loan. Rather, your FICO score’s range will likely determine which type of mortgage you can secure. It will also play a crucial role in how much home you can afford.
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What Affects Your FICO Score?
Knowing the way your FICO score is calculated can prove an invaluable asset. Because standardized methods are used and specific percentages assigned to designated areas of your financial portfolio, consumers have the ability to improve scores relatively quickly. FICO score calculations generally adhere to the following criteria.
- Repayment History: A thorough review of how you managed accounts comprises 35 percent of the total FICO score. The repayment of credit cards, auto loans, mortgages, child support, and even bills such as utilities and apartment rents can impact this portion of your score. Consistent, on-time repayment remains a key to raising or maintaining robust scores.
- Debt to Credit: Every consumer has a unique credit bandwidth. Companies that offer revolving lines of credit, personal loans, and others, influence your borrowing power. How much of that is utilized at a given time impacts 30 percent of your FICO score.
- Age of Accounts: Approximately 15 percent of a FICO score is based on the age of all your accounts. That’s why establishing good credit at an early age helps build FICO scores.
- Credit Inquiries: There are two types of credit inquiries consumers would be wise to consider. The first involves what is known as a “hard pull.” This occurs when someone applies for a loan product or credit card. Official hard pulls generally reduce scores for upwards of six months. By contrast, soft pulls associated with pre-approvals have a minimal effect on the 10 percent assigned to credit checks.
- Types of Credit: Having a mix of credit cards, personal loans, and other products, influence 10 percent of the overall number. A diverse portfolio helps build a healthy FICO score.
It’s important to keep in mind that your FICO score is not necessarily a fixed number. It changes based on these factors, and that means you can make adjustments to raise your score.
FICO Score vs Credit Score: What’s the Difference?
Questions revolving around FICO score vs credit score are common. Logic dictates that a singular, impartial system would arrive at one number, and zero confusion would exist. Although Fair and Isaac probably envisioned a perfectly consistent system back in the 1950s, lenders consider credit reports from three major bureaus — Equifax, Experian, and TransUnion.
The three major reporting organizations employ the standardized FICO system even-handedly. But they often base their calculations on access to different information. This can result in three somewhat different FICO scores for a single consumer. And for all intents and purposes, FICO score vs credit score are interchangeable terms. Lenders enjoy the discretion to consider all three, favor one bureau over another, or view the three FICO scores holistically.
How Do You Monitor Your FICO Score?
If you are unsure where your FICO score stands, you have a right to request a free copy of your credit report from each of the three major bureaus every 12 months. To simplify the credit report request process, you can visit AnnualCreditReport.com and fill out the online forms. There are also options to send a request by mail or to speak with a customer service representative on the phone. The online request generally offers the quickest, least stressful experience. Taking the time to monitor your credit report yearly can save you the unpleasant surprise of learning there is an issue, when you were hoping instead for a loan approval.
If you need help improving your credit score, Allegiance is here to help. Our free financial coaching, Credit Building Credit Card, and Credit Builder Loan can help you build or repair your credit, and get you back on your feet.