How Accurate Are FICO Scores Compared to Other Credit Scoring Models?

FT Contributor
The exterior of the Fair Isaac Corporation headquarters displaying the FICO logo.
Reading Time: 4 minutes

Lenders use credit scores to assess the risk of extending a loan or line of credit to a consumer. There are many different scoring models for this type of assessment, and one of the most common comes from the Fair Isaac Corporation (FICO).

In the past three decades, the FICO scoring model has become the favorite of most lenders. They use it to assess creditworthiness and decide on interest rates for accepted loan applications.  

Despite its popularity, FICO is still not the only credit scoring model used, and lenders who use some of the other options may come to different decisions than those who rely on FICO.

What Is a FICO Score?

In 1989, FICO developed a proprietary mathematical formula to calculate a consumer’s credit score based on their reports with different credit bureaus. As lending practices developed in previous decades, lenders had used varied and disparate scoring models to assess borrowers’ creditworthiness. A lot of these were highly subjective.

FICO brought some objectivity to the process, allowing for a fairer assessment with a mathematical algorithm. The company keeps the exact formula secret, but they do say which factors they consider and the percentages they weigh in arriving at the score, which ranges from 300 to 850.

Here is what your FICO score considers:

  • Your payment history accounts for 35% of your score. Your payment history is a record of how many times you make your payments on time and how many times you miss or default on them. Liens, repossessions, foreclosures, and bankruptcies on your record also play a role here.
  • Your credit utilization ratio accounts for 30% of your score. Your credit utilization is a ratio of the amounts you owe concerning your total credit. There’s nothing wrong with having many different credit accounts, but the closer you get to maxing them out, the lower your score will be.
  • The average age of your credit accounts makes up 15% of your score. The longer you have credit accounts in good standing, the better your score gets. FICO considers the average age of your credit accounts and the age of the oldest ones.
  • Your credit mix is 10% of your score. A good credit mix should have both fixed installment accounts (mortgages or auto loans) and revolving credit accounts with variable payments (credit cards). The greater the variety in your credit accounts, the higher your score in this area.
  • Recent hard credit inquiries account for 10% of your score. Every time you apply for new credit, the potential lender makes a hard inquiry to obtain your credit report. The more applications you file, the more inquiries, which signals a higher risk. This factor can bring down your score in the short term.

As you can see, you need to account for multiple factors when trying to increase your FICO credit score.

Why Do FICO Scores Matter?

Since most lenders rely on the FICO score when assessing applicant risk, it remains a critical equation. While there are other credit scoring models, they do not use the same formula, so the scores can differ significantly.

You need to understand, however, that one score does not paint a complete picture. In some cases, this can give you false hope when one credit score is very high, but your FICO score is significantly lower. This can work in the other direction, too, with a much higher FICO score than other models.

Since most lenders will look at your FICO score when assessing creditworthiness, you should always keep track of it.

Other Places to Check Your Credit Score

As mentioned earlier, FICO scores are not the only type of credit score you can get.

  • The most recent (and closest) competitor is VantageScore, which developed as the result of a combined effort by the three credit bureaus: TransUnion, Experian, and Equifax.
  • You can also get your credit report from the individual credit bureaus. Each of them builds your history based on information provided by creditors.
    • One major advantage they have over FICO is that, when you get a full report from Experian, Equifax, or TransUnion, you will be getting much more than just a number.
    • Even when two borrowers have the same credit score, they might have very different credit histories. Lenders might arrive at different decisions by reading their credit reports.
  • You can get your credit reports from different sources. For example, Credit Karma offers them for free. Note, however, that the main disadvantage of relying solely on one credit report is that lenders rarely use it as a standalone tool.
    • For starters, lenders will likely use credit reports from all three credit bureaus as well as your credit score to determine your creditworthiness.

Also, note that while Experian, TransUnion, and Equifax are all credit bureaus, FICO is not. It is a third party that uses your reports from all three bureaus to compile your score.

Is a FICO Score the Most Important Score?

Since its inception in the late 1980s, FICO has become synonymous with credit scores.

Since your FICO score uses data from your credit reports from all three bureaus, it is pretty accurate. By relying on your FICO score, you can get a clearer picture of how creditworthy you are in the eyes of lenders.

Since most lenders use this figure when making approval and interest rate decisions, it is beneficial to make an effort to increase your FICO score.

How to Get Your FICO Score

There are several places you can get your FICO score. Be careful, though, many unscrupulous websites are passing off their own scores as FICO scores. As a rule, if it does not explicitly say “FICO,” it’s probably not.

  • You can get your FICO scores from any of the three authorized FICO retailers. These are Experian, Equifax, and myFICO. This is the best way to ensure you’re getting your genuine score. You are entitled to a free credit report once a year.
  • You can also get your credit score from credit unions. While not all of them offer scores, you can still check to find out. Like the DCU Credit Union and Navy Federal Credit Union, large credit unions are more likely to provide them.
  • Some credit card issuers, such as Citibank, Discover, and American Express, provide FICO scores to credit card customers. These scores get updated every month, so you can see how they progress over time.

You can usually trust the numbers from these official sources, as long as they explicitly say that they are giving you the FICO credit score and not some other model.


Image Source: https://depositphotos.com/

 

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