You’ve probably heard about credit scores, but did you know that there are multiple scores at play? It’s not just different scoring models that come into play; the three credit reporting agencies also assign their own scores. And within the main scoring models—FICO and VantageScore—there are multiple scores, with one of the most popular being the FICO Score 8 credit score.
Introducing the FICO Score 8
The Fair Isaac Corporation (FICO) itself states that the FICO Score 8 is widely used, despite not being the newest version. But what exactly is the FICO Score 8, and why does it matter? Let’s dive deeper into everything you need to know.
What Sets Apart FICO Bankcard Score 8?
You may have come across another term that sounds quite similar—FICO Bankcard Score 8. This version specifically applies to credit card decision-making. So, when you apply for a new credit card, it’s likely that the card issuer will assess your creditworthiness using the FICO Bankcard Score 8. Unlike traditional FICO scores, which range from 300 to 850, FICO Bankcard Score 8 credit scores fall between 250 and 900.
Understanding How FICO Score 8 Works
FICO Score 8 is based on various factors that reflect your creditworthiness and overall debt. Each credit bureau—Experian, Equifax, and TransUnion—can provide you with its own credit score, as their data might differ. Even when the exact same information is listed on each bureau’s credit reports, FICO scores can still vary due to the optimization of predictive value based on each bureau’s unique data.
FICO Score 8 evaluates your credit score on five important factors:
- Payment history (35%): Paying your bills on time is crucial, as even one missed or late payment can negatively impact your score. Aim to pay all your bills before their due dates.
- Amounts owed (30%): This factor considers your credit utilization ratio, which is the amount of debt you have compared to your credit limits. It’s best to avoid using more than 30% of your available credit.
- Length of credit history (15%): The age of your credit accounts matters, so keeping old accounts open can boost your score, even if you’re not actively using them.
- New credit (10%): Opening or applying for too much new credit can signal financial instability to lenders. It’s important to manage new credit responsibly.
- Credit mix (10%): Having a diverse mix of different credit types, such as installment loans, lines of credit, and credit cards, can improve your score.
Why the FICO Score 8 Matters
FICO Score 8 is highly significant because it is widely used by lenders. A good FICO score (670 or higher) can open up financial opportunities that may otherwise be unavailable. On the other hand, fair credit (580 to 669) or poor credit (below 580) can make your financial life more challenging in multiple ways.
Here are some reasons why FICO credit scores matter:
- Eligibility for credit cards and loans: Lenders review your credit scores to determine if you meet their requirements for funding. A good FICO score increases your approval odds.
- Access to better rates and terms: With a good FICO score, you qualify for preferential rates and terms when borrowing money.
- Independence in borrowing: A good FICO score empowers you to get loans without needing a co-signer.
- Enhanced job prospects: Employers may consider your credit reports for hiring, and having good credit can give you an edge.
- Lower insurance rates: Insurance companies often assess credit scores to gauge risk. Good credit can lead to lower insurance rates.
What Makes FICO Score 8 Stand Out
With every new FICO credit score, improvements are made to ensure fairness for consumers. FICO Score 8 brought about several changes compared to previous models:
- Reduced impact of authorized user status: While being an authorized user on someone else’s credit card was once beneficial for building credit, FICO Score 8 minimizes this impact.
- Mitigated impact of occasional late payments: Occasional late payments have a less severe negative impact on credit scores.
- Amplified impact of regular late payments: Consistently late payments have a more substantial negative effect on credit scores.
- Increased scrutiny of high credit card balances: FICO Score 8 views individual cards with high balances as more concerning, resulting in a greater negative impact.
- Minimized impact of small accounts in collections: FICO Score 8 and newer models disregard small balance accounts (less than $100) in collections.
An Overview of FICO Score 8 vs. FICO Score 9
While FICO Score 8 remains widely used, FICO Score 9 was introduced in 2014 as an alternative. The major changes introduced with FICO Score 9 include:
- No impact from paid-off debts in collections: Debts paid off that were previously sold to collection agencies, including unpaid medical debts, no longer affect your score.
- Different treatment of medical debts: Unpaid medical debts in collections have a lower impact.
- Increased recognition of rent payments: FICO Score 9 gives more credit for rental history when payments are reported.
Alternatives to FICO Score 8
Although you can’t choose the credit score used by lenders, it’s helpful to know about alternative scoring models. These include:
- VantageScores: VantageScores are also used in decision-making processes for credit cards, auto loans, and banking. Alternative VantageScore models include VantageScore 1.0, VantageScore 2.0, VantageScore 3.0, and VantageScore 4.0.
Why All Your Credit Scores Matter
While FICO Score 8 holds significance, it is just one measure of your overall credit health. The steps to improve your credit are mostly the same, regardless of the scoring model used. Always pay your bills on time or early, keep your debt levels low, avoid opening multiple accounts simultaneously, and refrain from closing old accounts unless necessary. Following these principles will lead to a healthier credit score over time.
Frequently Asked Questions (FAQs)
Q: Is a FICO Score 8 good?
A: FICO Score 8 itself is not assigned a score of 8. Instead, it falls within the range of 300 to 850.
Q: What does a FICO Score 8 mean?
A: FICO Score 8 is one of the most commonly used types of FICO scores.
Q: What credit score is needed to buy a house with FICO Score 8?
A: Most lenders require a credit score of at least 620 for a conventional mortgage. However, specific FICO scoring models like FICO Score 2, FICO Score 5, or FICO Score 4 might be used in the mortgage industry.
Q: Which is better: FICO Score 8 or FICO Score 9?
A: FICO Score 9 is slightly more forgiving than FICO Score 8. It no longer considers paid-off collection debts and treats medical debts differently. Additionally, it places more weight on rental history.
Remember, all your credit scores matter, and taking actionable steps to improve them will pave the way to a brighter financial future.