Definition
A Credit Score is a statistical number that evaluates a consumer’s creditworthiness based on their credit history, presenting the likelihood of a person paying his debts. FICO Score, on the other hand, is a type of credit score created by the Fair Isaac Corporation, and it is a particular model used by many lenders. Hence, while all FICO scores are credit scores, not all credit scores are FICO scores.
Key Takeaways
- FICO Score and Credit Score both measure a person’s creditworthiness, however, FICO is a specific type of credit score created by the Fair Isaac Corporation. It’s often used by lenders to determine the risk involved in lending money to a specific individual.
- While both scores range from 300 to 850, the factors used to calculate the scores can slightly differ. FICO considers five factors in its scores: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). Other credit scores may not weigh these factors exactly the same.
- Not all credit scores are FICO scores but all FICO scores are credit scores. While lenders often use FICO scores to make lending decisions, some lenders may use other credit scoring models, such as VantageScore.
Importance
The terms “FICO Score” and “Credit Score” are often used interchangeably, but they are slightly different. A credit score is a numerical representation of an individual’s creditworthiness based on their credit history.
It is calculated by several credit bureaus using different models and can vary in range depending on the model used. On the other hand, a FICO Score is a type of credit score created by the Fair Isaac Corporation, which is used by many lenders to determine the potential risk posed by lending money to a person.
The distinguishing factor between the two terms is that FICO Score refers to a specific model of credit scoring, while a credit score can refer to any score calculated by any model. Understanding the difference is important as different lenders may use different types of scores, and each model weighs credit factors slightly differently.
Explanation
FICO Scores and Credit Scores serve as pivotal tools for lenders in deciding whether to extend credit, such as a loan or credit card, to an individual. These numerical representations hold immense significance as they directly influence the terms and conditions including the interest rates of the credit being offered.
They essentially present a snapshot of the consumer’s credit health at a certain point in time; a higher score indicating lower risk to the lender and thus, a higher likelihood of credit approvals. The FICO Score, developed by the Fair Isaac Corporation, is a specific type of credit score, and is predominantly used by many lenders to assess credit risk.
What differentiates it from the generic ‘credit score,’ is the distinctive algorithm used by FICO for their scoring model. FICO scores take into consideration five main components of a person’s financial history: payment history, current amount owed, length of credit history, new credit, and types of credit used.
Both FICO Scores and other Credit Scores indicate the creditworthiness of an individual, but different lenders might prefer one over the other based on their trust in the scoring model.
Examples of FICO Score vs Credit Score
**Home Loan Approval:** In real world scenario, a person applying for a home loan would need to undergo credit score evaluation. Most of the times, lenders consider FICO Score, as it offers a more in-depth analysis of one’s creditworthiness. If a person has a high FICO score, say around 700 or above, it increases his/her chances of securing a home loan at beneficial interest rates. However, if the lender was only considering the general credit score, some aspects of the individual’s creditworthiness might be overlooked.
**Credit Card Applications:** When a person applies for a credit card, the issuer looks into the applicant’s credit score to assess their credit behavior. Here, a universal credit score such as the VantageScore might be used. However, many credit card issuers prefer the FICO Score because of its detailed assessment and proven predictive power. The difference in approval or rejection could hinge on whether the credit card company uses FICO Score vs. an alternative credit score.
**Car Financing:** If one applies for an auto loan, the lender may use a different version of the FICO score called the FICO Auto Score. This score looks more at your history with auto loans specifically. So in this scenario, a customer with a good general credit score might get surprised when their loan application gets a higher interest rate, or even rejection due to a lower FICO Auto Score.
FICO Score vs Credit Score FAQ
1. What is a FICO Score?
A FICO score is a type of credit score created by the Fair Isaac Corporation. Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit. FICO scores take into account various factors in five areas to determine creditworthiness: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts.
2. What is a Credit Score?
A credit score is a numerical expression based on a level analysis of a person’s credit files to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bureaus.
3. How does a FICO Score differ from other credit scores?
While a FICO Score is used by most lenders to help them decide whether to offer you credit, there are other credit scoring models. FICO Scores are calculated differently than other scores, such as VantageScore. Though they consider many of the same factors, the weightage or importance given to each might be different.
4. Can having a good FICO Score guarantee a loan approval?
No, having a good FICO Score can not guarantee you a loan approval. While FICO Score is one of the most important factors lenders consider, it’s not the only one. They also look at your income, employment history, and the type of credit you’re applying for.
5. Is it possible to improve my FICO Score? If so, how?
Yes, it’s possible to improve your FICO Score. Some ways to do this include paying all your bills on time, reducing the amount of debt you owe, keeping unused credit card accounts open, and applying for and opening new credit accounts only as needed.
Related Entrepreneurship Terms
- Credit Report: A detailed report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.
- Credit Bureau: An agency that collects and maintains individual credit information and sells it to lenders, creditors, and consumers in the form of a credit report.
- Credit Rating: An assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.
- Credit History: A record of a consumer’s ability to repay debts and demonstrated responsibility in repaying debts.
- FICO Score Range: An individual’s FICO Score can range from 300 to 850, with a higher score indicating better creditworthiness. It is one of the most well-known types of credit score.
Sources for More Information
- Experian: This is one of the three major credit reporting agencies. It offers a wealth of information on both FICO scores and credit scores.
- TransUnion: As another of the major credit reporting agencies, TransUnion provides information about the differences between FICO scores and credit scores.
- Equifax: This is the third major credit reporting agency, which also provides detailed explanations about FICO scores versus credit scores.
- myFICO: As the official website of the company that invented FICO scores, myFICO provides a lot of useful information relating to FICO scores and how they differ from other credit scores.
