FICO is a pioneer of credit scoring. Founded in 1956, it introduced the first credit bureau risk score in 1981. Today, "FICO" has become synonymous with credit scores in the same way that "
- The three credit reporting agencies have created VantageScore, a competing generic credit score that has become widely available. If you get your credit score for free from a website like CreditKarma, you are looking at your VantageScore.
- FinTech start-ups have been trying to create alternative credit scores, and some marketplace lenders, like SoFi, have stopped using FICO completely.
- The Consumer Financial Protection Bureau (CFPB) has been very focused on the 26 million "credit invisibles" and the additional 19 million "unscorables" who do not have a FICO. Given the inability of people without credit scores to access affordable credit, the CFPB has been focused on finding ways to integrate people without scores into mainstream financial products.
Despite these attacks and challenges, FICO remains dominant. Regularly reviewing your official FICO score remains a good idea. You can find your official FICO for free in a number of places, which are listed at MagnifyMoney. Just remember that there are multiple versions of FICO and your score can vary depending upon the credit bureau used.
Why should you review your FICO score? Here are three reasons understanding your official FICO score remains important, despite the challenges and attacks.
1. The Mortgage Market Uses The Official FICO
Today, the vast majority of mortgages are being purchased by government mortgage agencies like
Government agencies move slowly, and FICO has had a monopoly on credit scoring for a very long time. If the mortgage crisis of 2008 did not force the agencies to change their underwriting approach, we should not expect any big changes in the near term.
2. Other Scores Look Similar
FICO has been very open about the key components of its credit score. 35% of the score is based upon your payment history. If you make your payments on time, you will have a good score. 30% of your credit score is based upon how much debt you owe. This particular indicator is very sensitive to utilization, which measures your total debt as a percentage of your total credit limits. 15% of the score is based upon the length of your credit history. The longer your credit history, the better your score will be. 10% of your score is based upon credit inquiries. Every time you shop for credit, you can lose a few points. And 10% of your score is based upon your credit mix. If you have demonstrated that you can manage a number of different types of credit, including installment loans and revolving lines of credit, you will get a better score.
This scoring methodology, which emphasizes the consistency of on time payments and the avoidance of excessive debt, remains the cornerstone of most credit scores. If you make your payments on time and keep your utilization low, you will likely have an excellent FICO score and you will likely have an excellent credit score anywhere else.
3. FICO Is Evolving
Under pressure from competitors, FICO is evolving its product set to respond. It has introduced FICO 9, which fixes some of the known issues with medical collections. And it launched FIXO XD, which leverages cable, utility, cell phone and other data sources to create scores for the previously credit invisible. Early results are encouraging, and we can expect FICO to continue to find ways to score more people. It is in their interest and the interest of their consumers, the banks and other lenders, to be more inclusive.
But just remember how FICO XD works. It is a pathway to a traditional FICO credit score. If you have a good FICO XD score, you could qualify for a traditional banking product. That product will likely report to the credit reporting agencies, which will help you graduate to a traditional FICO score.
Like many things in life, all roads still lead to the original FICO credit score.
Nick Clements is the Co-Founder of MagnifyMoney.
