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.
As an expert in the field of credit scores and financial analytics, I have extensive knowledge of the concepts and mechanisms behind credit scoring. My expertise is grounded in an in-depth understanding of credit rating algorithms, financial models, and the dynamics of credit reporting. I have actively followed developments in the credit scoring industry, including the methodologies employed by major credit rating companies such as VantageScore® and FICO®.
In the article provided, the discussion revolves around the generation, significance, and factors influencing credit scores. Here's a breakdown of the key concepts covered:
1. Credit Score Generation:
- Credit scores are three-digit ratings representing a borrower's history of repaying loans and lines of credit.
- Generated using algorithms from credit rating companies like VantageScore® and FICO®.
- Based on information in credit reports provided by credit rating bureaus (Experian™, Equifax®, TransUnion®).
2. Credit Score Significance for Lenders:
- Provides lenders with a snapshot of a borrower's risk.
- High credit score indicates a low risk of default, while a low score suggests a high risk.
3. Credit Report Sources:
- Credit reports compiled by credit rating bureaus from information provided by lenders and creditors monthly.
4. Variability in Credit Scores:
- Different scoring models may result in different credit scores for the same borrower.
5. Credit Scores as Predictors:
- Credit scores are not absolute predictors but serve as a barometer for a borrower's ability to repay a loan.
- The Federal Reserve notes that credit scores consistently predict relative loan performance.
6. Average Credit Score Range:
- Most credit rating companies' scores range from 300 to 850.
- Higher scores increase eligibility for loans or lines of credit approval.
7. Factors Contributing to FICO® Credit Score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
8. FICO® Study on Credit Score Accuracy:
- FICO conducted a study showing a correlation between credit scores and the likelihood of default.
- The study analyzed the actual performance of borrowers and their credit scores.
9. Credit Score vs. FICO® Score:
- "Credit score" and "FICO® score" essentially refer to the same thing.
- FICO® score is a specific type of credit scoring model.
10. Application of Credit Scores:
- Various entities, including lenders, landlords, and utility companies, consider credit scores when offering products or services.
In conclusion, understanding the intricacies of credit scoring is crucial for borrowers to navigate the financial landscape effectively. The factors influencing credit scores and their implications are essential for making informed financial decisions.
