If you recently applied for a new credit card or loan from a major bank or credit union, there’s a good chance the lender viewed your FICO® Score. Here’s why the FICO Score is important and what factors affect your score
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If you recently applied for a new credit card or other kind of consumer loan from a major bank or credit union, there’s a good chance the lender viewed your FICO® Score and may have shared with you the FICO Score obtained at the time of application.
While many lenders have ongoing programs to share updated FICO Scores, you may have also seen free educational three-digit credit scores through lenders or other companies.
Most top credit card issuers offer some kind of free score to customers. Some lenders, such as Discover, are even more generous, offering free scores to anyone willing to supply their information. Discover offers a free FICO® Score to the general public, while some educational sites and card issuers share VantageScore.
But what is the difference between the versions? Why are they different when applying for an auto loan or mortgage or applying for a credit card? Also, what is the difference between FICO® Scores and educational credit scores?
Sallie Mae’s research released in 2019 found that one’s credit score is not top of mind for many young adults noting that many are less likely to be aware of their FICO® Score and the factors that impact one’s score, let alone what sets their different scores apart.
Here’s a closer look at the most widely used consumer credit scores, how lenders use them and what makes each score unique.
See related: Which credit scores do mortgage lenders use?
How credit scores are used by lenders
For nearly three decades now, consumer credit risk scores have played an important role in lending. They not only help lenders efficiently assess/gauge new borrowers, they also give other interested parties, such as landlords or cellphone companies, a window into your credit health.
Most lenders use third-party credit scores, such as the FICO® Score (used in 90% of lending decisions), for soft credit checks before you’ve even submitted an application. A lender will then use these scores to help assess if the applicant meets the lender’s credit criteria. Most lenders also use internal credit risk tools to help assess an applicant’s creditworthiness and determine a borrower’s terms.
For example, a lender may use a FICO® Score distributed by credit reporting agencies in conjunction with their own internal scoring models. These internal risk tools may take into account additional financial information included in your application, such as your income and housing payment.
(Contrary to some persistent credit myths, your income is not shown on your traditional credit reports, nor is it included in your FICO® Score.)
Which credit score is your lender considering?
It varies by lender. There’s a good chance, though, that your lender is using some version of a FICO® Score, since FICO continues to be the most widely used credit score. FICO has designed various FICO® Score versions that are used by different industries due to different requirements. For instance, across the three credit bureaus, FICO® Auto Score 8 is widely used in auto financing, mortgage lenders often rely on FICO® Scores 2, FICO® Score 4 and FICO® Scores 5, and credit card issuers tend to check FICO® Bankcard Score 8 or FICO® Score 8.
FICO is considered the standard in credit scoring, trusted by lenders for decades. FICO is an independent data analytics company, meaning it’s not a credit bureau and not controlled or owned by any of the three major credit bureaus (Equifax, Experian and TransUnion). It has been an industry standard for over 30 years.
It can be a good idea to check your FICO® Score in advance of applying for credit using the FICO® Score Open Access program (if your lender is enrolled). This way, you will be able to stay on top of your credit score and it is a free resource.
Otherwise, you will find out which score a lender used if the lender declines to make an offer of credit or offers less-than-the most favorable terms because of your credit score. Lenders are required to disclose the score that influenced the outcome of your application and key factors (if declined). The lender must also provide you with brief explanations of their decision.
What influences varying credit score models?
It depends on the score. Technically, there are many different types of FICO® Scores, in addition to educational credit scores that are intended specifically for consumers who want to get a quick read of what their credit health might be, rather than provide the precise same number that lenders will review.
It’s also important to remember that credit score developers revisit the credit score models on a regular basis following changes in data or consumer behavior. However, lenders have the option to migrate to newer credit scoring models or use multiple FICO® Score models for different credit products so you may wish to inquire what FICO® Score version your lender will be using as part of the credit decisioning process.
For instance, while broad-based scores address the vast majority of applicants, credit scoring models that use alternative data sources such as FICO® Score XD that utilizes telecom data are available for entry-level credit products (reliably expanding credit access for over 200 million consumers), if there’s insufficient data at the credit bureau to provide a traditional FICO® Score.
The FICO® Score 8 and Score 9 models (the most widely used versions by lenders) rely on information that appears in your traditional credit reports, such as your loan payments and accounts. The UltraFICO™ Score, on the other hand, allows consumers to connect their checking and savings accounts cash flow data to potentially improve their score based on positive financial behavior.
Credit score versions matter
Making things a bit trickier, newer versions of your credit score may also look different from older versions of the same score, due to revisions in the way the scores are calculated. For example, a newer version of your credit score may treat a recent late payment with more weight than an older version.
As a result, the parts of your credit history that count most toward the success of your application will not only depend on the type of credit score that a lender uses. It may also depend on the version of that score your lender is using.
For example, FICO® Score 9, which was released in 2014, differs from every other prior FICO Score version by ignoring collection accounts that you’ve paid off and by giving less weight to medical collection accounts. Unlike older FICO® Score versions, it also considers rent payments. FICO® Score 10, which was released in 2020, is the first FICO scoring model to incorporate trended data, and the UltraFICO™ Score is the first score to consider recency and frequency of bank transactions and the consistent amount of cash on hand.
Similarly, the VantageScore 4.0 model expands from prior versions by placing significantly more weight on your total credit usage and your debt-to-credit-ratio than on your payment history. But VantageScore 3.0 – which is still in circulation – places more weight on your overall payment history than on any other component of your score. In addition, VantageScore 4.0 gives less weight to medical collections and it ignores new collection accounts that are younger than six months.
As you can see, it’s crucial to make sure that the credit score you’re monitoring is the actual score that your lender or card issuer is checking when making a lending decision.
Since your FICO® Score is likely to play a role in the decision, it’s always a good idea to stay on top of it. Check this page for the list of authorized FICO® Score retailers, as well as institutions and lenders that share FICO Scores with their customers through the FICO® Score Open Access program.
Although the term “credit score” is often used interchangeably, no matter what version is used, there’s no such thing as a universal score. The truth is you have many different credit scores – including from the same scoring developer.
But despite the differences between scores, the basic components of a good credit score remain the same: pay your bills on time, limit your credit usage, don’t close your oldest revolving account and don’t go wild applying for a whole bunch of credit at one time.
If you follow those basic rules of thumb, you should be able to build a credit score that you’re proud to show off to any lender.