Your credit report tells lenders how creditworthy you are. This figure gets calculated based on the information in your credit report. About 90% of lenders use FICO® scores to assess your eligibility for any loan you intend to take. Moreover, your rating affects the terms and rates lenders may offer you.
When you apply for credit, lenders estimate the risk they’re taking by lending you money. To this end, they pull your credit report and check your history. It contains late payments, bankruptcies, loans, and other relevant financial data about you.
You should understand that not every score offered online is a FICO score. Below you will learn how lenders rate you and what the difference between FICO and other scores is.
What Is a FICO Score?
Your FICO score is a number with three digits between 000 and 850 that stems from the data in your credit report. This figure guides lenders in determining your ability to service your debt. As a result, it affects the amount you can borrow, the repayment period, and the total lending cost.
When you request a loan, lenders review your previous lending practices to decide whether or not to lend you any money. The above three-digit number allows creditors to rate you fast and systematically. What you must remember is that many factors affect your FICO scores.
Is MyFICO the Real FICO Score?
FICO scores depend on the data in your credit report maintained by the major credit bureaus, Experian, Equifax, and TransUnion. Most scores vary from 300 to 850 and change frequently depending on your loans and debts—the higher your score, the lower the risk to lenders.
MyFICO is the official consumer division of FICO, the company that invented the FICO score. FICO® scores are the most accurate scores used as an industry standard for over 25 years. So in that sense, most people see the FICO score as the actual credit rating.
Should You Pay for MyFICO?
MyFICO memberships cost about $20 a month to get access to your score from one bureau. Luckily, other ways can help you estimate your FICO score without wasting money.
Credit card companies including American Express, Bank of America, Discover, Chase, and Citi give reports in their credit card apps for free. Plus, every American can get a free estimate from all three bureaus once per year at annualcreditreport.com.
The Difference Between FICO and Credit Scores?
FICO Scores are trademarks of Fair Isaac Corporation and serve over 90% of lenders when making lending decisions. Also, FICO scores are the financial standard for making accurate and fair creditworthiness estimates.
However, other ratings are also available online. Such agencies rate your scores differently than the FICO score range. For example, we have VantageScore, a less popular option. So, while other scores may resemble the FICO ones, remember that’s not the case. Instead, the main difference lies in the score ranges that vary significantly.
Why Are FICO Scores Important?
The FICO score offers creditors a systematic approach to judge potential customers. This way, lenders gauge how likely you’ll repay the borrowed funds. In short, you’ll probably get approved with favorable terms and higher loan limits if you have good credit.
Potential borrowers with minor defaults in the past might get approval with slightly worse terms and rates. Conversely, applicants with low scores that don’t meet the underlying requirements might get rejected outright.
What Is a Good FICO Score?
Each lender defines what a good FICO score constitutes (usually, FICO score ranges between 740-790). In general, most creditors consider scores above 670 to indicate good creditworthiness. Indeed, the higher your score, the lower the risk for the lender when approving your loan request. If you wish to repair your credit, check the credit repair organizations act.
Is FICO the Most Accurate Credit Score?
Not all available scores are FICO registered trademarks of Fair Isaac Corporation. For over 25 years, FICO scores have been the industry leader for determining each applicant’s credit risk. Today, most renowned lenders use the famous three-digit number to make faster, fairer, and more accurate lending decisions. However, other ratings can deviate from FICO scores by as much as 100 points.
How Can New Credit Increase or Lower Your FICO Score?
If a new line of credit helps diversify the accounts types you have, this can boost your credit mix factor. Plus, opening new credit can help you increase your score if you have a bad or no payment history. You can find some valuable guidance on how to improve credit score after Chapter 7 bankruptcy here.
In contrast, when applying for new credit, an inquiry will negatively affect your FICO scores. As a result, your score can decrease by up to five points. Also, when opening a new line of credit, you get closer to your credit limit, which could mean a lower score. Finally, credit utilization affects 30% of your total score, and it should ideally be between 10% and 30%.
Article contributors
Frank is a graduate of the Master's program in Economics Sciences. He has been passionate about writing in the financial niche. He enjoys discovering new ways to improve personal wealth and sharing them with his readers. In addition, Frank likes to travel and play board games.
