You have probably heard people talking about FICO scores or credit scores. You might have heard your bank or credit card issuer talk about the need to have good credit scores to get loans and lines of credit. In this article, I will mainly discuss the difference between FICO score and credit score.
But what are credit scores? Well, credit scores are figures that are used to express the creditworthiness of an individual. They show your possibility of paying a loan or a line of credit in the right amounts and on the right time. When you apply for a loan or a line of credit, you usually agree with the lender on how to make your payments.
Your current credit scores are a total reflection of how you have been using and repaying loans and lines of credit. If you have been making payments correctly, you are automatically going to have fantastic credit scores. Poor credit scores reflect poor repayment of your loans and credit card debts.
How to gain credit scores
You can get credit scores only if you use a line of credit or loans. The scores accumulate with time depending on how you use your loans or lines of credit. As you utilize your line of credit, credit issuers report your credit card usage to the credit bureaus. The bureaus keep the details and can come up with periodical credit reports as well as credit scores.
Credit scores do not accumulate in a day. You have to use lines of credit and loans for several months to realize a good number of credit scores. Usually, you can see a positive impact on your credit scores after six months. The more loans and lines of credit you take and pay, the more your credit scores grow.
The credit bureaus calculate credit scores. These are bodies entrusted with receiving loans and lines of credit repayments patterns from users and compiling reports and credit scores for specific borrowers. We have three credit bureaus that work independently from each other. They include Equifax, Transunion, and Experian.
Who calculates credit scores?
Credit scores are available online from the credit bureaus website. To get your scores, you have to register an account online with the concerned credit bureau and then pay to get them. You can register with any credit bureau to get your credit scores as they all produce the same data.
Also, you can get your credit scores for free from your credit card issuer. You only need to log into your account online and get started. You can also get your credit scores free from Credit Karma, an online platform that deals with financial matters. It is important to note that you only need to buy credit scores from the credit bureaus.
When getting your credit report, you do not pay anything. Unfortunately, a credit report does not contain credit scores. For your information, credit scores range from 300-850. 300 represents the lowest credit scores, while 850 represents the highest scores. The following table represents various groupings of FICO credit scores.
You can see how your various credit scores mean. But how much can I borrow with a 700 credit score? A credit score of around 700-850 is good, and you can get a high credit limit or a considerable loan amount. But to reach there, you must put in a lot of effort.
What Is the difference between FICO and credit score?
The two terminologies usually confuse people. Well, from today, you will be able to know what the two are. You cannot separate FICO and credit scores as there is an interrelationship between the two.
FICO provides a scoring model for credit scores. Therefore, FICO is one of the companies that help to come up with credit scores. Therefore, credit scores are one of the products of FICO. Other companies also calculate credit scores. If you have ever heard of Vantage credit scores, those are credit scores from another company called Vantage.
Therefore, a credit score is a general term to refer to a product produced by FICO and other risk assessing companies. If you hear FICO scores, then that is a specific brand of the FICO company. The same applies to the Vantage scores and so on.
How do I grow credit scores from scratch?
A fresh college graduate from a college or university may have no credit history at all. If such a person wants to grow credit scores, they can opt for a secured credit card. The card allows you to pay a deposit amount to a credit card issuer, then get a credit card from which you can borrow against. Various credit card issuers can give you secured credit cards as long as you have all the needed application details.
The query remains, how long does it take to build credit with a secured credit card? It is good to understand that you cannot build credit scores within a day, a week, or a month. When using a secured credit card and paying off your debts well, it can take up to six good months to notice changes in your credit scores.
You can also grow your credit scores when you take a credit builder loan. Most financial companies are ready to issue beginners with credit builder loans to help them shape their financial destiny. Credit builder loans work like secured credit cards since you have to deposit money to borrow against.
If you have bad credit scores due to poor credit card usage, such as late payment utilizing too much of your credit, or have unpaid debts, you are likely to have poor credit scores. In such a case, you can get an unsecured credit card for bad credit, a secured credit card, or a credit score builder loan.
How are credit scores calculated?
The calculation of credit scores follows specific criteria that rely on various pieces of information. Credit bureaus use the following pieces of information to come up with your credit scores.
i) Payment history
Payment history shows how you have been paying your loans. If you have been paying your loans and lines of credit well, then you stand a better chance to have many credit scores. Payment history contributes 35% of your credit scores. That means you should make your payments without delay to make sure that your scores are good.
ii) Amounts owed
The amount owed contributes up to 30% of your credit scores. If you use less line of credit, you will have a low amount owed. If you use a lot of your line of credit, you will have low credit scores. Therefore, you should maintain low credit utilization of not more than 30% to be on the safe side.
iii) Length of credit history
Length of credit history contributes up to 15% of your overall credit scores. If you started using credit cards several years ago, you would likely have your length of credit contributing to a considerable number of credit scores.
iv) Credit mix
Credit mix refers to having various kinds of credits. You can get various kinds of loans such as personal loans, mortgage loans, credit cards, and home equities, among others. Credit mix contributes to 10% of your credit scores.
v) New credit
New credit contributes 10% of your overall credit scores. If you take too many new credits, then you will be affecting your scores negatively.
How to repair my credit scores
You can repair your credit scores if you are really in need of good credit scores. There are various ways you can use to repair your credit scores. They include the following.
1) Mix your credit
As I mentioned earlier, mixing your credit refers to taking various kinds of debts such as auto loans, credit cards, personal loans, student loans, and so on. That way, you have many companies reporting about your credit and loan repayment, and you stand an excellent chance to grow your credit scores faster.
2) Pay all your dues
If you have debts with creditors, you should pay them off. If your creditors took your details to debt collectors, you could make a point of clearing with them. Most debt collectors are ready to remove your name from their database if you quickly clear with them.
3) Get a credit repair company
A credit repair company assists you in the credit repair process. You only need to pay the correct fees, and you are good to get the necessary services. Remember that a credit repair company is only beneficial when you are very busy following up with your debt repayment and other processes that assist you in repaying your loans.
4) Get a secured credit card
I mentioned secured credit cards being a better option to grow your credit scores from scratch. Secured credit cards are also good options to repair your damaged credit scores. A secured credit card is easy to get since the only security you need is your deposit.
Credit scores measure the creditworthiness of an individual. Credit scores range from 300-850. 300 represents the lowest number of credit scores, and 850 represents the highest. Credit bureaus calculate credit scores using various credit scoring models. FICO and Vantage are some of the credit score companies in the country. You can grow your credit scores if you use a secured credit card or a credit builder loan appropriately.