How FICO Scores Work
Along with the credit report, lenders can also buy a FICO
score based on the information in the report. That FICO
score is calculated by a mathematical equation that evaluates many
types of information from your credit report at that agency. By
comparing this information to the patterns in hundreds of thousands
of past credit reports, the FICO score identifies your level of
future credit risk.
In order for a FICO score to be calculated on your credit report,
the report must contain enough information-and enough recent information-on
which to base a score. Generally, that means you must have at least
one account that has been open for six months or longer, and at
least one account that has been reported to the credit reporting
agency within the last six months.
ABOUT FICO SCORES
Credit scores are often called "FICO scores" because
most credit scores used in the US and Canada are produced from software
developed by Fair Isaac Corporation (FICO). FICO scores are providedto
lenders by the three major credit reporting agencies:
Equifax, Experian andTransUnion.
FICO scores provide the best guide to future risk based solely
on credit report data. The higher the score, the lower the risk.
But no score says whether a specific individual will be a "good"
or "bad" customer. And while many lenders use FICO scores
to help them make lending decisions, each lender has its own strategy,
including the level of risk it finds acceptable for a given credit
product. There is no single "cutoff score" used by all
lenders.
YOU HAVE THREE FICO SCORES
In general, when people talk about "your score;' they're talking
about your current FICO score. But in fact there are three different
FICO scores developed by Fair Isaac-one at each of the three main
US credit reporting agencies. And these scores have different names.
The FICO scores from all three credit reporting agencies are widely
used by lenders. The FICO score from each credit reporting agency
considers only the data in your credit report at that agency. Fair
Isaac develops all three FICO scores using the same methods and
rigorous testing. These FICO scores provide the most accurate picture
of credit risk possible using credit report data.
WILL YOUR SCORES BE DIFFERENT?
FICO scores range from 300 to 850. Fair Isaac makes the scores
as consistent as possible between the three credit reporting agencies.
If your information was exactly identical at all three credit reporting
agencies, your scores might still differ because the models for
the three credit reporting agencies are developed separately. However,
all three scores would be within a few points of each other.
Some people will find that their scores at the different bureaus
will vary by more than a few points. The differences in scores can
be caused by a couple of different factors:
- The way lenders and other businesses report information to the
credit reporting agencies sometimes results in different information
being in your credit report at the three agencies.
- The agencies may also record the same information in different
ways. Even small differences in the information at the three credit
reporting agencies can affect your scores.
Since lenders may review your score and credit report from any
of the three credit reporting agencies, it's a good idea to check
your credit report from all three and make sure they're all accurate.
Frequently Asked Questions
Are FICO scores unfair to minorities?
No. FICO scores do not consider your gender, race,
nationality or marital status. In fact, the Equal Credit Opportunity
Act prohibits lenders from considering this type of information
when issuing credit.
Independent research has shown that credit scoring is not unfair
to minor"lties or people with little credit history. Scoring
has proven to be an accurate and consistent measure of repayment
for all people who have some credit history. In other words, at
a given score, non-minority and minority applicants are equally
likely to pay as agreed.
Are FICO scores the only credit risk scores?
No. While FICO scores are the most commonly used
credit r"lsk scores in the US, lenders may use other scores
to evaluate your credit risk. These include:
- Application risk scores. Many lenders use
scoring systems that include the FICO score but also consider
information from your credit application.
- Customer risk scores. A lender may use these
scores to make credit decisions on its current customers. Also
called "behavior scores," these scores generally considerthe
FICO score along with information on how you have paid that lender
inthe past.
- Other credit scores. These scores may evaluate
your credit report differently than FICO scores, and in some cases
a higher score may mean more risk, not less risk as with FICO
scores. When purchasing a credit score for yourself. make sure
to get the FICO score, as this is the score most lenders use when
making credit decisions.
