FICO Score 5 vs. FICO Score 8: An Overview
Borrowers have more than just one credit score. Each of us probably has dozens or hundreds of credit scores, depending on which rating company that the lender chooses. Most lenders look at a borrower’s FICO (formerly Fair Isaac Corporation) score, but there are even multiple FICO scores for each borrower. FICO Score 8 is the most common, especially with credit card companies, but FICO Score 5 can be popular with auto lenders and mortgage providers.
Different versions exist because 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 5 is one alternative to FICO 8 that is prevalent in auto lending and mortgages.
- FICO 8 was introduced in 2009 and is the eighth version of the FICO credit score.
- Moneylenders rely on the industry-specific FICO rather than the base version.
FICO Score 5
FICO 5 is one alternative to FICO 8 that is prevalent in auto lending and mortgages. In particular, FICO 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 comprises FICO Score 2. For TransUnion, it is FICO Score 4. All three are used in concert for mortgages. By comparison, FICO 8 utilizes information from all three credit reporting agencies.
One reason why a mortgage provider, especially a bank, would rely on FICO 5 or FICO 4 instead of FICO 8 (or even the newer FICO 9 and/or FICO 10 Suite) is that 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
FICO 8 is the eighth version of the FICO credit score. According to FICO, this system “is consistent with previous versions,” but “there are several unique features” that make FICO 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 credit decisions. It also completely ignores collection accounts in which the original balance is less than $100.
The additions to FICO 8 include increased sensitivity to 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 that the lender chooses.
FICO 5 relies solely on data from the credit reporting agency Equifax, while FICO 8 uses data from all three of the top credit reporting agencies: TransUnion, Experian, and Equifax. FICO 8 is more popular than FICO 5, especially when it comes to credit card companies. This is in part because FICO 8 is more highly sensitive to large balances on credit cards that are close to the card’s limit. It is also tougher on repeated late payments than FICO 5.
However, FICO 5 is more likely to be used by mortgage and auto lenders, because it is less forgiving of unpaid collection accounts, particularly medical, than FICO 8, something that acquires increased importance in loaning large sums of money.
Normal FICO vs. Industry-Specific FICO
There is another distinction between normal or “base” FICO scores and 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 mortgage.
There are multiple versions of FICO 5, including one each for mortgages, automobiles, and credit cards. Moneylenders rely on the industry-specific FICO rather than the base version. If a consumer applies for a car loan, then their FICO 5 auto score may be more important than either their base FICO 8 or FICO 5.