The FICO Credit Scoring Model Explained

FICO holds the distinction of most reliable scoring model thanks in no small part to its longstanding track record. Fair Isaac Company began computing these scores back in 1989. They have since revised the algorithms a number of times in the past over three decades to adjust for shifting factors so that they produce continuously dependable credit scores

The traditional FICO score model will produce a score for you from 300 to 850. Scores of less than 600 equate to poor. If your score is higher than 740 then this is deemed to be excellent. The ranges in between 600 and 740 mean from average to above average credit worthiness. 

The New FICO Score 9 Model

In 2014, FICO introduced its FICO 9 scoring model. The primary revision in this model was to reduce the importance of unpaid medical bills. The reasoning behind this is that medical debts that are not paid are not truly financial health indicators. 

You might be waiting for insurance to pay a medical bill or simply be unaware that a medical bill had been given over to a collection agency. For some people, this important change allowed their credit score to increase by up to 25 points. 

Other changes in 2017 stopped collectors from reporting late medical debts that were not yet 180 days delinquent. Year 2017 also saw the three credit reporting bureaus drop all of their data on civil judgments and the tax lien records from their files. FICO reported that this helped the scores of around six percent of consumers. 

Before FICO 9 There Was FICO 8

Before FICO 9 came out, FICO 8 (that the company developed in 2009) was the standard credit score version. FICO 8 remains the most commonly utilized score of the lending industry. FICO 8’s distinguishing features were to penalize you for charging near your total credit limit each month and to provide clemency if you had only a single late payment of over 30 days. 

It is worth noting that each time FICO releases an updated version on its scoring models, lenders may keep the version they are using or upgrade. FICO 8 has remained the overwhelming favorite simply because it costs so much to upgrade to the new model. There are lenders still utilizing even FICO 5 models. 

You can ask your lender which model they are using when you go through the application process. 

FICO scores typically do not change that much over the short term. The exception is if you start missing payments or showing charge offs and defaults. Not everyone has a FICO score either. If you do not have credit, you will fall into the category of what experts call “credit invisible.” 

You must have six months of payments reported to the credit bureaus in order to have a FICO score. 

The second main scoring model in use today is the Vantage Score model. The three credit bureaus Experian, Equifax, and TransUnion made a rare show of unity back in 2006 when they decided that they would create a competitor to FICO in an effort to standardize credit scores. The end result was to increase the number of credit scores available to lenders and creditors. 

The Vantage Score Model

Vantage Score’s model considers similar data to FICO but weights them differently. They look at on time payment of your bills, maintaining lower credit card balances, and taking on too many new credit obligations to compile their score. Vantage’s primary advantage for people who are new to credit is that they can generate a score for you in as little as two months from your first reported credit card payments. 

FICO scores are different from generic credit scores. They utilize a proprietary set of algorithms to come up with your credit risk using the information found within your personal credit reports. Other companies will often pattern their credit scores to look as close to a FICO credit score as they can, but as FICO notes, this can result in scores that are even 100 points apart from the gold standard in the industry. 

Even a couple of points can determine whether you get a favorable interest rate and set of terms (saving you as much as thousands of dollars over the term of the loan or credit).

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