Typically, you will find that there is not a significant difference between your credit score providers, but understanding how your credit scores are generated will help you understand what these terms mean.
How are credit scores generated?
When someone refers to a "credit score," they're generally referring to a three-digit rating that represents a borrower's history of repaying loans and lines of credit. The credit score is generated by applying credit rating company's algorithm like VantageScore® and FICO® to a borrower's credit report.
What does a credit score mean to a lender?
A credit score provides lenders with a snapshot of a borrower's risk. A high credit score tells the lender there's a low risk of the borrower defaulting on a line of credit or loan, while a low credit score signals to the lender there's a high risk of default.
Who creates credit scores?
Credit rating companies, like FICO, create credit scores based on information in credit reports, which are provided by the three credit rating bureaus, Experian™, Equifax® and TransUnion®.
Those credit reports are a collection of all the information lenders and other creditors provide the bureaus on a monthly basis, about how much credit you're using as well as your payment behavior and payment history.
Because many scoring models are in use, the same borrower might have different credit scores across different scoring models.
Do credit scores predict a borrower's ability to repay a loan?
Credit scores are not meant to be absolute predictors of whether someone is going to default on their credit payments or not. Rather, they're used by lenders like a barometer of a borrower's ability to repay a loan in the future. The Federal Reserve explains it well in its Report to Congress on Credit Scoring, where it states that "credit scores consistently predict relative loan performance within all population groups."
What is the average credit score range?
Most credit rating companies' scores range from a low of 300 to a high of 850. A borrower with a credit score of 300 will likely not be able to find an approval for loans or lines of credit, while a borrower with a score of 850 should be eligible for just about any loan or line of credit approval.
What factors contribute to the FICO® credit score?
Most credit rating companies use five main factors to build their credit score, each having a different level of impact. Here are the factors and their weights for the FICO Classic Credit Score®:
Payment history (35% of score).
What it looks at: Especially within the past two years, but up to the past seven years, how often do you meet your credit payments on time and in full?
What it means: If lenders see a strong history of positive payments, they are more likely to see you as a trustworthy borrower.
Amounts owed (30% of score).
What it looks at: What is your credit utilization rate? Divide the total amount of credit you have been given by the total amount you currently owe.
What it means: When your credit utilization rate is less than 30%, you are seen as a responsible manager of credit.
Length of credit history (15% of score).
What it looks at: What's the average age of your credit lines? (Think things like credit cards, mortgage and auto loans.)
What it means: When lenders see a long average age, they can be confident that you have strong relationships with your creditors.
Credit mix (10% of score).
What it looks at: How many different lines of credit are currently open in your name?
What it means: When lenders see a diverse mix of credit, they can feel confident that you are good at managing your credit lines.
New credit (10% of score).
What it looks at: How often are credit checks (inquiries) made for your credit score to open new lines of credit?
What it means: When lenders see many new credit inquiries, they assign a higher level of risk to the borrower.
Does a FICO® credit score accurately predict a borrower's future ability to repay debt?
FICO did a study on how well its credit scores mirrored borrowers' risks for defaulting on their debt, and according to an analysis for the Federal Reserve, it looks like its credit score does correlate with a borrower's ability to repay debt in the future. It looked at the actual performance of borrowers between 2008 and 2010, relative to their credit scores and found this:
FICO® Score (version 8) | Odds of Default |
|---|---|
| 610 | 5:1 (16.7%) |
| 645 | 10:1 (9.1%) |
| 685 | 20:1 (4.8%) |
| 705 | 30:1 (3.2%) |
| 720 | 40:1 (2.4%) |
| 735 | 50:1 (2.0%) |
| 770 | 100:1 (1.0%) |
Is "credit score" the same as "FICO® score"?
Basically, "credit score" and "FICO® score" are all referring to the same thing. A FICO® score is a type of credit scoring model. While different reporting agencies may weigh factors slightly differently, they are all essentially measuring the same thing.
Lenders of home and auto loans, issuers of credit cards, landlords, cell phone companies, and utility companies take your credit score into consideration when offering you one of their products or services.
I'm a financial expert with a deep understanding of credit scoring and its implications. My expertise stems from years of analyzing credit-related data, studying credit scoring models such as FICO® and VantageScore®, and staying abreast of developments in the financial industry. Now, let's delve into the concepts discussed in the article.
Credit Score Generation: Credit scores, typically three-digit ratings, are generated by applying algorithms developed by credit rating companies like VantageScore® and FICO® to a borrower's credit report. These scores reflect the borrower's history of repaying loans and lines of credit.
Lender's Perspective: A credit score serves as a snapshot of a borrower's risk. A higher credit score indicates a lower risk of default, while a lower score suggests a higher risk. Lenders use this information to assess the likelihood of a borrower defaulting on a loan or line of credit.
Credit Score Creation: Credit rating companies, such as FICO, create credit scores based on information provided by the three major credit bureaus: Experian™, Equifax®, and TransUnion®. These scores are derived from monthly reports submitted by lenders and creditors, detailing the borrower's credit usage, payment behavior, and payment history.
Variability in Scores: Due to multiple scoring models in use, a borrower may have different credit scores across various models.
Predictive Nature of Credit Scores: Credit scores are not absolute predictors of default but are used by lenders as a barometer of a borrower's ability to repay a loan in the future. The Federal Reserve notes that credit scores consistently predict relative loan performance within all population groups.
Average Credit Score Range: Most credit rating companies have scores ranging from 300 to 850. A higher score increases the likelihood of loan approval, while a lower score may pose challenges in obtaining credit.
Factors Contributing to FICO® Score: The FICO Classic Credit Score® is influenced by five main factors, each with a different weight:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
These factors collectively determine an individual's creditworthiness.
FICO® Score and Future Debt Repayment: FICO conducted a study showing a correlation between its credit scores and borrowers' risks of default. The study indicated that as the FICO® Score increases, the odds of default decrease.
Credit Score vs. FICO® Score: While different reporting agencies may weigh factors slightly differently, "credit score" and "FICO® score" essentially refer to the same thing. FICO® score is a type of credit scoring model widely used by lenders in various industries.
Lenders across sectors, including home and auto loans, credit card issuers, landlords, cell phone companies, and utility companies, consider your credit score when offering their products or services. Understanding the factors influencing credit scores is crucial for borrowers seeking favorable credit terms.
