Credit is a huge part of your financial life. Before you go and apply for credit, it’s important to understand your FICO score vs. credit score, where your credit stands, and how it works. Knowing if you have a good FICO score is helpful because it's how lenders will determine whether to offer you a loan.
It also impacts your wallet in other ways and can save you or cost you hundreds of dollars a year, if not more. In many ways, your FICO Score is a lot like a grade on how well you manage money.
What is a FICO score?
So, what is a FICO score exactly? There are many types of credit scores out in the market today, but most lenders use the FICO Score. If you’ve applied for credit in the past, it’s very likely your lender pulled your score from FICO.
FICO (formerly Fair, Isaac, and Company) is an analytics company and uses data, like your credit history, to make predictions. Their FICO Score is a type of credit score used by lending institutions to decide whether to extend credit to you. It also determines your interest rate too. (But more on that below).
The credit scores are three digits and typically range from 300 to 850. The higher the number, the better your credit. Anything over a 700 is considered a good FICO score.
Now we answered "what is a Fico score" so let's get into the difference of the fico score vs. credit scores.
FICO score vs. credit score: The difference
So, FICO score vs. credit score, what is the difference? Basically, your FICO score is one of the types of credit scores you can get. Although FICO dominates the credit industry, lenders use others like VantageScore too.
Those scores will be different since they’ll use their own proprietary technology and analytics to make their predictions about your credit. Since they use different analytics, you will notice a difference in your credit scores. It also depends on which credit report the scoring model uses.
Another difference in fico score vs. credit scores is the ability to generate a score for you. For instance, FICO requires you to have at least one account open for six months. However, VantageScore may be able to produce a score with a one-month history that has been reported in the last two years.
Which FICO Scores do lenders use?
When comparing the FICO score vs. credit scores, it’s also important to know that while FICO scores are used by 90% of the top lenders, lenders use different versions of FICO scores depending on the type of financing you plan to secure (a mortgage versus an auto loan, for example).
FICO Score 8 is still the most widely used version. But FICO Score 9 is gaining traction and includes a more nuanced treatment of medical collection accounts.
How do lenders use FICO Scores?
When you apply for financing, lenders use your credit reports and your FICO scores based on the data in your credit reports to determine your creditworthiness.
While your credit reports contain information collected on your track record of handling debt, your FICO scores summarize how likely you are to repay a new debt obligation. This includes:
- Payment history
- Amount owed (Credit utilization rate)
- Length of credit history
- New accounts
- Types of credit (cards, installment loans, etc.)
These credit score factors are not all treated equally when it comes to your credit score. For example, your payment history (35%) and amount owed (30%) holds more weight than new credit (10%), credit mix (10%), and length of credit history (15%).
Depending on these variables, you can find yourself paying a low-interest rate on a credit card or not qualifying for credit at all. So, having a good FICO score can help you qualify for loans and lower rates.
How your FICO Scores are used in lending decisions
Here are some of the most common scenarios where you will want to know not just your credit score, but your FICO Scores as well.
1. Opening a credit card
You might apply for a credit card to take advantage of a beneficial rewards program or to start building a positive credit history. Many credit card issuers evaluate how much of a credit limit to extend based on your FICO Scores. Be mindful of using your credit card responsibly and paying your balance each month.
2. Financing a car
The average cost of a new car can extend to over $40,000. Many people chose to pay for a car through financing without coming up with such a large sum of money upfront. For this type of transaction, lenders typically use your FICO Auto Score 8 as part of underwriting the car loan.
In addition, the way you manage your credit and your resulting FICO Scores can also impact the cost of your auto insurance (unless you live in California, Hawaii, or Massachusetts). Drivers with bad credit pay over $1,000 more per year than drivers with good credit.
3. Refinancing student loans
One effective way to tackle student loan debt is to lower the total cost of the loans by refinancing with a new lender at a lower interest rate. Lenders who offer student loan refinancing rely, in part, on your FICO scores to decide whether you are eligible to take advantage of lower interest rates.
4. Purchasing your first home
Buying a home is one of the largest purchases you will likely make that requires financing. Along with a healthy down payment, your FICO Scores from the three nationwide credit bureaus are used by home lenders to determine whether you will be able to secure the lowest interest rate possible.
How to prepare before you apply for credit
A strong credit score is based on a solid history of positive financial habits. The best approach to establish good financial behavior and maintain strong FICO scores is:
- Pay all your bills and loans on time, every time
- Reduce your overall debt to credit ratio by paying down debt
- Use a minimal amount of your revolving credit available
- Limit unnecessary credit inquiries
- Resolve errors on your credit reports
Then you will place yourself in the best position possible when seeking credit throughout your financial journey. FICO works with more than 100 financial institutions to provide consumers with access to their credit score that matters through the FICO Score Open Access program.
A good FICO score will benefit you financially
Now that you understand the difference between the FICO scores vs. credit scores and how it impacts your finances, you can see why having a good fico score is important.
A good FICO score helps you qualify for big purchases such as a car or a home. It will also save you a ton of money because you qualify for lower rates too. Learn how to build good credit with our free course!