Three major credit bureaus compile information about consumers’ borrowing habits and use that data to create detailed credit reports for lenders. Another organization, FICO, developed a proprietary algorithm that scores borrowers numerically from 300 to 850 on their creditworthiness. Some lenders make credit decisions based strictly on a borrower’s FICO Score, while others examine one or more of the borrower’s credit bureau reports.
This article explains how FICO and two of those major credit bureaus work.
- FICO, Experian, and Equifax all provide information on individuals’ credit habits for the use of lenders.
- FICO provides just a numerical credit score, based on an individual’s payment habits and the amount of debt that they carry.
- Credit bureaus like Experian and Equifax offer detailed credit histories on individuals.
How FICO Works
Fair, Isaac and Co. (which became Fair Isaac Corp. in 2003 before rebranding as FICO in 2009) developed the FICO Score in 1989 by creating a closely guarded mathematical formula that considers a variety of information contained in consumers’ credit bureau reports. The company does not reveal the exact scoring model it uses, but its website does indicate how scores are weighted.
Payment history, or how frequently the borrower pays bills on time, is the most important factor, accounting for 35% of their score. Amounts owed, meaning the ratio of a borrower’s outstanding debt to their credit limits, make up another 30%. Length of credit history is 15% of a borrower’s score; seasoned accounts raise a FICO Score. Credit mix accounts for 10%, with FICO rewarding borrowers who demonstrate that they can manage various types of debt, such as mortgages, auto loans, and revolving debt. New credit makes up the remaining 10%, with FICO looking down on borrowers who have recently opened multiple credit accounts.
Thus, achieving a high FICO Score requires having a mix of credit accounts and maintaining an excellent payment history. Borrowers should also show restraint by keeping their credit card balances well below their limits. Maxing out credit cards, paying late, and applying for new credit haphazardly are all things that lower FICO Scores.
More banks and lenders use FICO to make credit decisions than any other scoring or reporting model. Although borrowers can explain negative items in their credit report, the fact remains that having a low FICO Score is a deal breaker with numerous lenders. Many lenders, particularly in the mortgage industry, maintain hard-and-fast FICO minimums for approval. One point below this threshold results in a denial. Therefore, a strong argument exists that borrowers should prioritize FICO above all the bureaus when trying to build or improve credit.
FICO’s biggest drawback is that it leaves no room for discretion. If borrowers apply for a loan that requires a minimum FICO Score of 660 for approval and their score pulls as a 659, then they are denied the loan, regardless of the reason for their score. It could be something that in no way indicates a lack of creditworthiness for the particular loan being sought, but unfortunately, the FICO scoring model does not lend itself to subjectivity.
Borrowers with low FICO Scores who have positive information in their credit reports should pursue lenders that take a more holistic approach in making credit decisions.
Among numerical scoring models, FICO’s main competitor is VantageScore, which was developed in 2006 as a joint venture of the major credit bureaus: Equifax, Experian, and TransUnion.
How Experian Works
Experian is one of the three major credit bureaus that produce reports detailing consumers’ borrowing habits. Many creditors, such as mortgage lenders, auto finance companies, and credit card issuers, report borrowers’ outstanding debt and payment histories to Experian, as well as to its peers Equifax and TransUnion. The bureaus organize this information into reports that show which accounts are in good standing, which are in poor standing, and which are in collections, along with relevant public records, such as bankruptcies and liens.
Experian’s advantage over FICO is that the information it provides is far more detailed and thorough than a simple number. A pair of borrowers could both have 700 FICO Scores but vastly different credit histories. By reviewing Experian credit reports, lenders can look at each borrower’s actual credit history—every debt that the person has owed for a decade or longer—and analyze how that person managed their debt.
The main disadvantage of Experian is that, unlike FICO, it is rarely used as a stand-alone tool to make credit decisions. Even lenders that review credit reports in detail rather than go off a borrower’s numerical score often look at results from all three bureaus, not just Experian.
Consequently, borrowers should periodically review all three of their credit reports to keep an eye out for erroneous or derogatory information.
Your credit reports from the three major credit bureaus may contain somewhat different information, depending on which creditors report to them. If you find errors on any of your credit reports, you can challenge them.
How Equifax Works
Like Experian, Equifax is a major credit-reporting bureau. It produces credit reports similar to those from Experian and that follow a similar format. Equifax reports are detailed and easy to read. For example, if a borrower who five years ago paid a credit card bill late applies for a loan, a lender reviewing their Equifax report can pinpoint the exact month of the late payment. The report also shows debts owned by collection agencies and liens against the borrower’s assets.
The advantages of Equifax are similar to those of Experian. The bureau’s reports are detailed and provide lenders with deeper information about a consumer’s borrowing habits than just a number. Its disadvantages are also the same. Borrowers cannot safely gauge their chances of loan approval by looking at their Equifax report alone. However, if their Equifax report is much stronger than their Experian report or FICO Score, then they have the ability to search for lenders that prioritize Equifax.
How can you obtain your credit score?
You can obtain your FICO Score free of charge from some credit card companies (usually if you’re already a customer) and independent websites.
How can you obtain your credit reports?
You can obtain your credit reports free of charge from all three major reporting agencies at the official website for that purpose: AnnualCreditReport.com.
What is a good credit score?
Most credit scores range from 300 to 850, with 670 and up generally considered to be a good score. FICO Score ranges are similar.
The Bottom Line
FICO provides a single-number credit score, while major credit bureaus like Equifax, Experian, and TransUnion (not covered in this article) offer a more detailed look at an individual’s credit history along with the score. Lenders may use a combination of credit scores and credit reports in deciding whether to make a loan or issue a credit card.