Whenever you apply for any sort of credit whether it be a credit card, car loan, or mortgage, the lender wants to know what the level of risk they would take by lending money to you. To determine the level of credit risk, lenders use FICO scores. Everyone has three FICO scores- one for each credit bureau: Experian, TransUnion, and Equifax. Each of these three scores is based on the information that these three credit bureau has in their file on you. As the information included in your file changes, so will your credit sore. Your FICO scores affect how much and what loan terms lenders will offer you so it is imperative that you maintain good credit and take steps to improve your FICO scores if necessary.
To calculate each of your three FICO scores, your three credit reports must contain the following to ensure there is enough recent information to base a FICO score on:
-at least one account open for 6 or more months
-at least one account that has been updated in the last 6 months
About FICO Scores
Credit bureau scores are called FICO scores because the software used to produce credit scores was developed by Fair Isaac and Company. The major credit reporting agencies provide FICO scores to lenders to help them determine if there is substantial risk involved in a particular transaction. The higher the credit score, the lower the risk is but no score can tell the lender whether an individual will be a “good” or “bad” customer. Lenders utilize FICO scores to help them make decisions when it comes to when and when not to lend, but each lender has a different strategy when it comes to the decision that includes the level of risk they find acceptable. There is no universal “cutoff score” used by lenders and lenders utilize a number of different factors when determining your interest rate.
Other Names for FICO Scores
Each of the credit reporting agencies use a different name for FICO scores. All of the scores, while under different names, are developed from the Fair Isaac and Company methods and have been tested to ensure that they are an accurate depiction of credit risk from the data available.
Equifax- BEACON Score
Experian- Experian/Fair Isaac Risk Model
Numerous Credit Scores
When you see commercials or hear people discussing “your score” they are talking about your current FICO score. This can be misleading because there is no one credit score used to make decisions regarding your credit. This is because:
- Credit Bureau scores are not the only scores used- Lenders often utilize their own credit scores based off of not only your FICO score, but other information about you as well.
- FICO scores are not the only credit bureau scores- Although FICO is the most commonly used score, there are other credit bureau scores that may evaluate your record differently than FICO scores. In some cases a higher score may mean more risk, not less as it is with your FICO score.
- Your credit score may be different at each of the main credit reporting agencies- Your FICO score at each of the three credit reporting agency is based off of only the data in your credit report at that agency. If your current scores fro the three agencies are different, it is because the data each has in your file is different.
- Your FICO score changes over time- As the data the credit reporting agency has in your file changes, so will the credit score based off the report. Your FICO score a month ago is likely to be different from your FICO score today.