Credit score and fico score difference
My Financial Future
We are used to seeing scores on sports channels. However, when we refer to a credit score, we are talking about a very different type of game: The personal finance game where getting a good “score” represents how likely we are to be reliable borrowers and re-payers. That is exactly what a FICO® score tries to estimate, the likelihood we will pay our debts back on time.
There are many types of credit scores developed by different companies. The FICO® score, developed by Fair Isaac Corporation, is one of the most commonly referenced scores, and we will examine this particular one in this post.
How is a FICO® score calculated?
Your FICO® credit score is calculated from your FICO® credit reports (learn the difference between a score and report). The FICO® score is composed of three digits (between 300 and 850), and it is calculated by a math formula that takes into account the following factors:
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
It deserves a mention that the importance of each factor varies per person, their credit record, and other external factors.
An explanation of each concept:
– Amounts owed FICO® points out that “owing money in a credit account does not necessarily mean you are a high-risk borrower with a low FICO® Score.” Everything will depend on the amount of credit you use compared to the amount you could use (called the “credit utilization ratio”). The best option, according to FICO®, would be “using a low percentage of your available credit.”
– Length of credit history In general, the longer your credit history, the better, according to FICO®. However, “even people who haven’t been using credit long may have high FICO® Scores, depending on how the rest of the credit report looks.”
– Credit mix in use FICO® scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. At only about 10% of importance to your overall score, this is not the most important factor but it could be relevant if your credit report does not have a lot of other information on which to base a score.
– New credit Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history. Your FICO® Scores look at how many new accounts you have by type of account.
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