The Fair Isaac Corporation, more often referred to as FICO, is a major analytics software company that provides predictive analysis to consumers. It’s the most widely used producer of consumer credit scores that businesses use when deciding to issue credit.
The company’s algorithms are designed to predict your future behavior. For instance, a credit score of 620 is considered subprime and indicates a higher likelihood you will have trouble paying back a loan. This number is based on your past paying behavior and is used by financiers to reduce risk.
You may also have noticed that the score provided by sites like Credit Sesame and Credit Karma are different from scores like myFICO or the information in your credit card statements.
The different arises because most free credit score sites use VantageScores, while others simply use an adjusted version of your FICO score.
What's the difference between Vantage Score and FICO?
VantageScore is a credit card rating that was developed by Equifax, Experian and TransUnion. It’s used as an alternative to FICO scores.
The big advantage it offers is that the credit monitoring services don’t have to pay as much, so there’s a smaller burden on you. It’s fairly accurate when compared with FICO scores, but not so widely used.
It’s what referred to as an educational score—it’s available to consumers but not used by lenders.
The first difference between VantageScore and FICO is the range: VantageScore ranges from 501 to 990 while FICO goes from 300 to 850.
Therefore, your VantageScore will invariably be much higher than your FICO score. When looking at your FICO score, though, remember that there are 56 different versions of your it. The most commonly used of these is Score 8.
You can’t really be bothered to understand all of them, but luckily enough, you don’t have to. Here are the most common ways your score is used.
Credit scoring for mortgages
The most commonly used scores used when applying for a mortgage are FICO scores 2, 4 and 5.
These are usually contained in a larger product known as a residential mortgage report or RMCR. This report includes information from Equifax, Experian and TransUnion.
Since this report is usually based on data from all three credit card bureaus, there’s bound to be duplicate information.
These pieces of information are usually screened out, and thus RMCRs are referred to as merged reports. They are a filtered version of information from different sources.
There are three main reasons mortgage lenders use RMCR:
1. Mortgage lenders use the middle of three credit scores
Lenders usually select the middle score from three credit bureaus to make their decision.
Therefore, if your scores are 722, 788 and 650, your score will be 722.
2. Every creditor doesn't report to all three credit bureaus
Since a creditor may only report to, say, two bureaus, the only way a lender can know your true credit profile is using information from all three.
3. RMCRs contain additional information
RMCRs also contain additional information: both regarding your residence and employment history.
This information is used as verification of what you enter on your loan application. This is in addition to legal information such as bankruptcies.
Credit scoring for credit cards
When it comes to credit cards, the requirements are far less consistent than those used by mortgage lenders.
A credit card lender may use as little as two credit scores. A FICO score is typically among them, usually referred to as a Bankcard score, but most of them don’t reveal which credit card bureaus they use.
Other credit card lenders still, might use in-house credit scoring models as an additional way of verifying your credit score.
It’s not really meant to replace the FICO score, but usually approximates your credit card experience more closely.
However, there’s another catch to how credit cards evaluate how much risk you pose: the methods used change very frequently.
This is usually because the lenders will always looking to evaluate their portfolio and manage risk.
For instance, if more card holders pay late in one month than usual, the approval requirements may tighten temporarily. This is meant to avoid taking further risk with what are considered risky accounts.
Another factor to consider is that the standards used by the lenders may not be as exact as those used by mortgage lenders. This is because mortgage lenders place loans with the same agencies, meaning credit score levels will be the same regardless of the mortgage lender.
Credit card lenders use much more diverse standards.
Some credit card lenders require a minimum score of 700, while others have no problem approving a 650 credit score.
Additionally, they may use different underwriting criteria to evaluate both your credit and how financially fit you are overall.
For instance, one lender may put their emphasis on credit card utilization of cards you’ve previously owned rather than your mortgage payment history. On the other hand, others prefer to use your credit mix as a way of determining your risk.
This is where the Bankcard score comes in. It provides a different score from the rest by weighing in all these factors.
In the end, it provides a different score for a credit card lender than it would for a mortgage lender.
Credit scoring for auto loans
Similar to credit card companies, auto lenders have their own unique FICO scoring system referred to as the FICO Auto score.
This is a customized scoring model for the car lending industry. This system places greater attention to pay histories on car loans and other installment-based debts rather than credit cards and mortgages.
Despite this, it shouldn’t differ too greatly from your regular FICO score. Most times, it should not be more than 15 to 20 points in either direction.
Among the factors considered in your FICO Auto score is whether you currently have a car loan, a paid car loan and your past history in terms of payments, with regards to those loans.
The biggest challenge with the FICO Auto score is the fact that you can’t obtain it from any agency or on your own. It’s a proprietary system that’s only used by auto lenders, and is thus only available through them.
If you arrange for financing through a dealer, you could potentially be at a huge disadvantage.
Another problem with the FICO Auto score is that some car dealers will refuse to tell you your score and credit before you select the car you’re going to buy.
Unlike with mortgages, if you shop at a dealer, there is no way for them to determine how qualified for a loan you are. Therefore, there is no way they can help you determine which car you can afford, what monthly rate will suit you best and what your score is.
Essentially, they won’t go through the trouble and expenses of pulling your FICO Auto score unless they know you’re a serious buyer.
If you prefer not go through this tedious process, you can apply for a car loan through your bank, online auto lender or credit union. Normally, there is no extra cost to following this method, and is in fact the more recommended choice since financing is one of the biggest revenue sources for car dealers.
In any case, if you have no real knowledge of your FICO score with regards to auto financing, you could end up getting a raw deal. That includes those who are still able to get through a dealer.
Know Your FICO Score
As you can see, the way credit scores work can be somewhat confusing. But after you get a decent understanding of the different systems, you're in a much better position to make more informed financial decisions.
One of the most important things to keep in mind is that there are different credit scores, each meant for different purposes. So just because you got one score from some place, don't assume it's your only one.
