When applying for a loan or a mortgage, a good credit score can help you gain better terms and faster approvals. In the U.S., lenders depend on credit reports created by three credit bureaus. These bureaus use consumers’ borrowing habits to populate credit reports and provide a credit score. A FICO score is a numerical interpretation of a person’s creditworthiness derived using an algorithm developed by the Fair Isaac Corporation (FICO). Read on to understand the differences between FICO, Experian, and Equifax.
FICO is not a credit reporting agency. FICO derives an individual’s credit score by using credit bureaus and lenders’ information to calculate creditworthiness. It is a numerical value that lies between 300 (Bad credit) and 850 (excellent credit). Factors that affect the score include a person’s payment history, outstanding debt, length of credit history, and credit mix. Paying bills on time, maintaining healthy credit lines, and maintaining a low debt-to-income ratio can contribute to a healthy credit score. Many lenders and financial institutions solely rely on a borrower’s FICO scores to make credit decisions.
Experian is one of the nation’s three credit rating agencies that create consumer credit reports. This credit bureau uses a consumer’s payment and debt information that it receives from creditors like auto finance companies, mortgage lenders, and other credit lenders. Experian creates detailed reports about an individual’s finances, debt, and bankruptcies using this compiled information. Experian’s credit reports give lenders a thorough understanding of a person’s actual financial health and credit history. Unlike a FICO score, lenders use Experian’s credit reports in conjunction with other reporting agencies’ information.
Equifax is another credit reporting bureau that creates credit reports and assigns numerical credit scores based on these reports. As with FICO, Equifax’s credit score is a three-digit number that ranges from 280 for those with bad credit history to 850 for those with healthy credit. Equifax’s detailed reports allow lenders an insight into an individual’s borrowing and repayment history and include debts in collection.
If you have a higher rating under a particular scoring system, you can increase the chances of your loan getting approved by applying to lenders who prioritize using that model.