When it comes to understanding creditworthiness, two terms come up often: Credit Score and FICO Score. But what exactly do they mean? In this article, we will delve deeper into the difference between these two scores and how they are calculated. Whether you’re just starting out or just looking for a refresher, this guide will help you navigate the world of credit scores with ease.
What is a credit score?
A credit score is a numerical representation of your creditworthiness. It ranges from 300 to 850 and is based on factors such as your credit history, the number of accounts you have, your total debt level and your repayment history. Lenders use credit scores to assess an individual’s likelihood of repaying loans in a timely manner. This gives them insight into how reliable a borrower is when it comes to repaying borrowed money.
What is a FICO score?
A FICO score, on the other hand, is a specific type of credit score created by Fair Isaac Corporation. Lenders use FICO scores, along with other information from credit reports, to evaluate credit risk and make decisions about extending credit. Like a credit score, a FICO score also ranges from 300 to 850 and takes into account various factors such as payment history, current debt level, types of credit used, length of credit history and new credit accounts. It provides lenders with an overall assessment of a borrower’s creditworthiness.
Calculations: how they differ
Although credit scores and FICO scores serve the same purpose, the main difference is how they are calculated. Credit scores are provided by the three major credit reporting agencies: Equifax, Experian and TransUnion. These bureaus use their own models to generate credit scores based on the information they have about an individual’s credit history.
FICO scores, on the other hand, are not generated directly by credit reporting agencies. The Fair Isaac Corporation partners with these bureaus and provides its own analytics to calculate FICO scores. The FICO score has been highly regarded and trusted since its introduction in 1991. Although other credit scoring models, like Beacon scores, still exist, FICO has become the industry standard.
Understanding your scores
If you expect to see just one FICO score when you visit fico.com, you might be surprised. Instead, you’ll likely see multiple versions of your scores from different credit bureaus. This is because FICO provides its own version of the credit score based on information from each bureau. However, there is no need to worry about the differences between your credit score and your FICO score. They are closely related, and if you have good credit, both scores will likely reflect that.
In conclusion, credit scores and FICO scores play a crucial role in assessing your creditworthiness. While credit scores are provided directly by credit reporting agencies, FICO scores are generated using analytics provided by Fair Isaac Corporation. Understanding the difference between these two scores can help you navigate the complex world of credit with confidence. Remember, if you have good credit, both scores will likely be in your favor. So keep working to maintain a healthy credit history and you will reap the benefits in the long run.