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FICO and credit scores is a popular name in the credit industry. They are well known for their scoring systems which lenders use to determine an applicant's creditworthiness. But how are they different?
Generally, FICO scores vary by credit bureau while credit scores don't. Although both scores range from 300 to 850, FICO scores tend to be higher at a similar credit rating. Besides, FICO scores are easier to get than credit scores.
The rest of this article will explain the key differences between FICO and credit scores. Read on for information on these and insights into improving both scores to increase the chances of getting loans.
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What Differentiates FICO and Credit Scores
Most banks, credit card companies, carmakers, home buyers use FICO scores to determine the risk for lending money or other goods. This score ranges from 300 to 850, with a higher number being more favorable.
It is one of the most commonly used score models today, and it's available for free on many sites.
Similarly, credit scores are used by banks, credit card companies, carmakers, and homebuyers to determine the risk for lending money or other goods. A credit score ranges from 300 to 850, with a higher number increasing the chances of getting credit.
Here’s a video that gives an overview of how FICO and credit scores are determined:
There are a few significant differences between FICO and credit scores, so let’s talk about them.
FICO Scores Vary by Credit Bureau
Each credit reporting agency has different information on file, which can affect a FICO score.
For example, Experian knows about your payment history and late payments, which affect your FICO score. TransUnion may have more in-depth information about other debts you've had to pay back in the past.
In contrast, credit scores do not. While there are a few different companies that offer credit scores, they all use the same three major factors:
- Payment history
- Amount of debt
- Length of credit history
FICO Scores Are Higher
Lenders tend to look more favorably at a FICO score of 720 or higher, while some may not accept a credit score that is below 600.
A credit score of 680 or higher is typically considered a good credit score. In contrast, anything below 579 is deemed to be poor.
Why You Need Both Scores for Your Financial Health
While the difference between FICO scores and credit scores is significant, it's not something you should stress about.
What's important is that you have both types of credit scores, so you know your financial health.
A good score will help you save for retirement or buy a car, while a poor credit score can make it harder to get an apartment rental agreement or even a cellphone plan.
It might be worth checking out your credit score or hiring someone to assist you in doing so if you need money for something, like saving for retirement. However, it's unnecessary to pay for your FICO score since it is available online at no charge.
How Payment History Affects Your FICO and Credit Scores
Your payment history has a significant impact on your FICO and credit scores.
If you pay your bills on time, you may get a higher score since this shows that you are financially responsible. Your payment history is essential because it shows that you've always paid your bills on time or made partial payments when necessary.
Suppose instead, though, that you tend to pay only the minimum due on your credit card bill each month. Assuming this becomes a habit of not paying off your entire balance, your credit score may suffer, limiting your access to credit finance.
Ways to Improve Your FICO and Credit Scores
Let’s look at those ways now.
Repay Debts on Time
One thing you can do to improve your credit score is to pay off outstanding debts and keep them paid off in the future. If you owe bills, such as credit card debt, make sure to pay them back on time every single month.
You can improve your credit by making payments on time, which shows that you are responsible for the way you manage debt.
Do Not Close Accounts With Debt
Another thing you can do is avoid closing accounts with debt.
Even if you don't use your credit card, paying off debt on time each month will improve your FICO score and credit history. If you have a bad FICO or poor credit score for various reasons, you might need to hold on to more debt.
However, you can still improve your FICO and credit scores by paying off debt, so it looks like you have fewer accounts with debt. This will help boost your score since debt is one of the most critical factors in determining a credit score.
Keep Accounts Active
You should also keep your accounts open for as long as you can. If you have an old account with little to no debt, then there's no need to close it. In fact, closing credit cards and other accounts may even hurt your FICO and credit scores since this shows that you've closed accounts recently.
If you want to improve your credit scores in the long run, then it's best to keep accounts open so they can help boost your FICO score over time.
Review Annual Credit Report
Another vital thing to do is review your annual credit report.
Even if you've already checked over your reports once, it's best to make sure that there aren't any errors in them. Checking your credit score and reviewing credit reports regularly is recommended, which helps you spot and fix any issues that might be hurting your FICO and credit scores.
If there is a mistake on one of your credit reports, contact the organization in question and ask them to update it with accurate information.
For more valuable insights into how to get lower rates on loans, I recommend reading 101 Powerful Tips For Improving Your Credit Score from Amazon.com. The author gives a rundown of credit scoring, how it works, and how you can develop good financial habits that attract lower interest on your debt.
If you want a more accurate representation of your creditworthiness, a credit or FICO score may come in handy.
Whichever one you choose, though, it's important to know what they mean so you can make informed decisions about how much risk to take on when applying for new loans or lines of credit to get access to cash fast.
That said, don't forget to clear all debt obligations on time and keep your accounts active to improve your credit ratings and unlock access to more cash.
Credit Sesame helps you access, understand, leverage, and protect your credit all under one platform - free of charge.