FICO scores can be confusing — after all, there are over 50 that exist and new scores keep coming out. But, your FICO score is also the main data point lenders use to qualify applicants for credit cards, loans, and alternative financing.
If you value your credit-worthiness, you must understand how FICO scores work. There are thousands of facts and countless score definitions, but with so much to talk about the terminology can get mixed up.
To air out the confusion, we are going to explain five key facts about FICO scores.
1) You Have Three Scores Per Type of FICO Score
You will hear about different types of FICO scores — such as FICO Auto Score and FICO Bankcard Score — but, there will always be THREE that exist. This is because each credit bureau generates a rating based on the information they have on file about you!
Does that make sense?
Equifax, Experian and TransUnion each receive information from lenders about your borrowing activities with them. If you miss a few payments, that gets reported and reflects negatively on your credit score.
Meanwhile, the lender is only obligated to report to at least one of the three credit bureaus. Most report to all, or at least two, but this can create an inconsistency between your credit reports.
While your credit accounts and your creditors can influence your FICO score calculation, the difference is only significant if there were reporting errors. A slight inconsistency between the three files is fine, but credit report errors can be deleted — this should also bring up your FICO score at that particular bureau.
That said, each bureau uses the same algorithm to calculate your FICO score. The numbers you get from the three bureaus are based on the same mathematical formula, and only your consumer report can create a difference in your actual score.
2) There’s No ‘Ideal’ FICO Score Points Range
You might find that we regularly share an image about how FICO scores are calculated — it’s a pie chart, showing that payment history makes up 35% of the score, outstanding debt makes up 30%, and so on.
That chart gets shared because it’s the mathematical formula put in place for the vast majority of FICO scores. In fact, they are just starting to deviate form the norm; it’s anticipated that FICO will modify their algorithm to create a VantageScore 3.0 alternative for marginal borrowers.
Now, we avoid sharing the FICO scores points range image too much because it’s literally a cause of confusion. That’s what we want to prevent; you cannot say “this many points makes a good credit score,” because the ratings range differs by FICO score type!
Your FICO Score 8 rating is heavily used and more up-to-date than the original FICO Score that was created back in 1989. It’s just an updated version though; the points range has not changed, it’s between 300 and 850 points.
So, we can classify these ranges based on their score quality — but, many assume these ranges will apply for the other FICO scores too.
The confusion comes because FICO originally created the base FICO score, updated it to FICO Score 1, 2, 3, etc., and then deviated to alternatives like FICO Auto Score with different scoring models. As they are all scores by FICO, people assume they all work the same; the truth is, they can differ a little bit.
As of November 2015, the following rule of thumb is accurate: the base FICO score ranges from 300 to 850 points, but any industry-specific ratings will range from 250 to 900 points.
3) It’s Not Easy to Order Your FICO Score
There’s a lot of confusion circling around how you can obtain your FICO score yourself. Much of this originates from the fact that there are so many different scores you could buy — and because you have to order one score per bureau.
First, you can assume that getting your FICO score for free will be a challenge. We did suggest a few free FICO score tricks recently, but even these are restricted — for instance, there are around 100-millions today that can get their FICO score for free through their credit card issuer. This came about after the creation of FICO Score Open Access Program, which was a response to the Fair Access to Credit Scores Act getting publicized.
There might be better ways to get your score for free in the future — but for now, the only way to track all three scores regularly is with myFICO’s credit monitoring service. As this is the consumer branch of FICO, you can count on their information to be consistent. This will cost you $29.95 per month, but it gets you your reports and scores from all three bureaus every three months.
Alternatively, you can make a direct purchase and pay $19.95 to order your FICO score from myFICO’s website. This is only the cost for one bureau, so you can expect to pay $59.85 for all three scores. If you checked every three months, this would cost you $239.40 over a year — versus $359.40 (or $329 upfront) to get scores AND credit monitoring AND identity theft protection!
4) Your First Imperfection Hurts a Lot
People work hard to build their credit, and some are over-the-top with making sure no payments are missed. This is because these people understand how damaging it can be to miss a step.
Say you spend 20 years building your finances and you manage to obtain a 780-plus FICO Score. This is great, and it will give you a substantial advantage compared to other borrowers with lesser scores.
Now, pretend a missed payment gets reported from one of your creditors for the very first time. While the particular account will play a role in your score drop, you can expect to lose 90 to 110 points from your score.
What does this mean?
On average, $62,300 of interest is paid on a $100,000 30-year fixed rate mortgage when you finance with a 780-plus FICO score.
If you get the mortgage after your score drops from the missed payment, then you will pay substantially more in interest as a result — around $95,927 in total.
That one missed payment just cost you $33,627!!!
… and this is exactly why it’s really important to take your FICO score serious!
5) Monitoring Your FICO Score Will Not Hurt It
There are some instigators on the Web that spread false information on how FICO scores get calculated. They think that by pulling your credit report and score on a regular basis, that this would cause their score to cave.
The truth is, pulling your credit report on your own will result in a soft inquiry on your credit report. This will show up on the file at the bureau from where the score was pulled. Under the logic of those instigators, you could pull you score at one bureau and crash it to oblivion; all the while, the other two bureaus think you are some amazing borrower!
These soft inquiries are not hurting your credit score. If it was a lender pulling your file, that would be a different story as it makes a hard inquiry and can cause a small points loss. But, you are free to monitor your FICO score as often as you want — again, this will not hurt it!
You Need to Clear the Confusion!
Really, this stuff should be taught in schools — too many youths go into their adult lives and make borrowing mistakes. It’s to the point where people are sabotaging their credit, and their chances of buying a home, over $50 to 200 worth of errors. Even worse, there’s a serious neglect among young adults and students to truly grasp how they are supposed to keep safe from identity theft risks.
If you care to prepare for your financial future, then you should start today with a real credit education!