Did you know there are many different calculation models used to determine your credit risk? The two most common methods are FICO scores and credit scores. While both models use many of the same factors to determine credit risk for issuing credit cards and personal loans, there are still a few differences you should be aware of.
What is a credit score?
Credit scores are numbers usually ranging from 300-850 issued by the three U.S national credit bureaus – Transunion, Equifax, and Experian. With high credit scores, you will not only qualify for higher credit limits, but you can also get approved for better interest rates than you could with low or no credit. All of your financial details involving credit such as your debt, payment history, and unused credit will also show in your credit report along with your credit score. Whenever you apply for a personal loan or a credit card, your lender will query one or all of these credit agencies to acquire your credit data.
What is a FICO score?
FICO scores are commonly used by the top 90% of major lending institutions to determine credit risk, but not all credit scores are FICO scores. There’s a more than likely chance that when you apply for a mortgage, credit card, or auto loan, your potential lender will look at your FICO score to determine if you qualify or not. FICO scores are based on many factors such as payment history, total debt, amount of credit limit used, and the age of your credit history. FICO scores are generally considered to be more reliable than standard credit scores because they use more advanced algorithms to calculate credit risk and provide scores based on your credit reports. This usually leads to decisions being made using FICO scores that are drastically different from the result of decisions made using standard credit score ratings.
The bottom line
While traditional credit scores may be arguably inferior to FICO scores, you should do your best to keep yourself in good standing with as many credit models as you possibly can. Building your credit history and keeping a close track of your current ratings is a good place to start.