FICO 5 vs. FICO 8: An Overview

Borrowers have more than just one credit score. In fact, each of us probably has dozens or hundreds of credit scores depending on which rating company the lender chooses. Most lenders look at a borrower's FICO score, but there are even multiple FICO scores for each borrower. FICO score 8 is the most common, but FICO score 5 can be popular with auto lenders, credit card companies, and mortgage providers.

Different versions exist because FICO, or Fair Isaac's Corporation (NYSE: FICO), has periodically updated its calculation methods over its 25-plus-year history. Every new version is released to the market and made available for all lenders to use, but it is up to each lender to determine if and when to implement an upgrade to the latest version.

FICO Score 5

FICO score 5 is one alternative to FICO score 8 that is prevalent in auto lending, credit cards, and mortgages. In particular, FICO score 5 is widely represented in the mortgage industry. The information inside a borrower's FICO 5 comes exclusively from the credit reporting agency Equifax. Information from Experian composes FICO score 2. For TransUnion (NYSE: TRU), it is FICO score 4. By comparison, FICO 8 utilizes information from all three credit reporting agencies.

One reason a mortgage provider, especially a bank, would rely on FICO 5 or FICO 4 instead of FICO 8 (or even the new FICO 9) is because earlier versions are less forgiving of unpaid collection accounts, especially medical accounts. Mortgages are very large loans, and mortgage lenders tend to be more cautious with them.

FICO Score 8

The eighth version of the FICO credit score is known as FICO score 8. According to FICO, this system "is consistent with previous versions" but "there are several unique features that make FICO score 8 a more predictive score" than prior versions. FICO 8 was introduced in 2009.

Like all prior FICO score systems, FICO 8 attempts to convey how responsibly and effectively an individual borrower interacts with debt. Scores tend to be higher for those who pay their bills on time, keep low credit card balances and only open new accounts for targeted purchases. Conversely, lower scores are attributed to those who are frequently delinquent, over-leveraged, or frivolous in their credit decisions. It also completely ignores collection accounts in which the original balance is less than $100.

The additions to FICO score 8 include increased sensitivity two highly utilized credit cards—meaning that low credit card balances on active cards can more positively influence a borrower's score. FICO 8 also treats isolated late payments more judiciously than past versions. "If the late payment is an isolated event and other accounts are in good standing," says FICO, "Score 8 is more forgiving."

FICO 8 also divides consumers into more categories to provide a better statistical representation of risk. The primary purpose of this change was to keep borrowers with little to no credit history from being graded on the same curve as those with robust credit histories.

Borrowers have more than just one credit score. Each probably has dozens or hundreds of credit scores depending on which rating company the lender chooses.

Normal FICO vs. Industry-Specific FICO

There is another distinction between normal or "base" FICO scores versus industry-specific FICO scores. Base versions, such as FICO 8, are "designed to predict the likelihood of not paying as agreed in the future on any credit obligation." Industry-specific FICO scores single out a specific type of credit obligation, such as a car loan or a mortgage.

There are multiple versions of FICO 5, including one each for mortgages, automobiles, and credit cards. Money lenders rely on the industry-specific FICO rather than the base version. If a consumer applies for a car loan, it is possible that their FICO 5 auto score is more important than either their base FICO 8 or FICO 5.

Key Takeaways

  • FICO score 5 is one alternative to FICO score 8 that is prevalent in auto lending, credit cards, and mortgages.
  • FICO score 8 was introduced in 2009 and is the eighth version of the FICO credit score.
  • Money lenders rely on the industry-specific FICO rather than the base version.