March 13th, 2019 12:12 PM by Jackie A. Graves
Fico vs. Experian vs. Equifax: An Overview
Lenders have a wide array of data available to make decisions on
borrowers. Three major credit
bureaus compile information about consumers' borrowing habits
and use that information to create detailed credit reports, while another
organization, Fair Isaac Corporation (NYSE: FICO), or FICO, developed a proprietary
algorithm that scores borrowers numerically from 300 to 850 on their
creditworthiness. Some lenders make credit decisions strictly based on a
borrower's FICO score, while others examine the data contained in one or more
of the borrower's credit bureau reports.
When seeking a loan, it is helpful for borrowers to know their
FICO score, as well as what is on their credit bureau reports, such as those
from Experian PLC (EXPN.L) and Equifax Inc. (NYSE: EFX). A borrower who appears stronger
under a particular scoring or reporting model should seek out lenders that use
Fair, Isaac and Company (name changed to Fair Isaac Corporation
in 2003) 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 on time versus late, is
the most important factor, comprising 35 percent of a borrower's score. Amounts
owed, meaning the ratio of a borrower's outstanding debt to his or her credit
limits, make up another 30 percent. Length of credit history is 15 percent
of a borrower's score; seasoned accounts raise a FICO score. Credit mix
accounts for 10 percent, with FICO rewarding borrowers that demonstrate that
they can manage various types of debt, such as mortgages, auto loans, and
revolving debt. New credit also makes up 10 percent; FICO looks down on
borrowers who have recently opened multiple credit accounts.
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
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 bureaus when trying to build or improve credit.
biggest drawback is that it leaves no room for discretion. If borrowers apply
for a loan that requires a minimum of 660 FICO 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 implies 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 quality information in their credit reports should pursue
lenders that take a more holistic approach to making credit decisions.
Experian is one of the three major credit bureaus that produce
reports detailing consumers' borrowing habits. Creditors, such as mortgage
companies, auto finance companies, and credit card companies, report borrowers'
outstanding debt and payment histories to Experian, as well as to its peers
Equifax and TransUnion (NYSE: TRU). The bureaus organize this information
into reports that break down which accounts are in good standing, which are in
bad standing, and accounts that are in collections and public records, such as
bankruptcies and liens.
Experian has its own numerical scoring model, known as Experian PLUS, which
offers a score from 330 to 830. Experian PLUS scores correlate strongly with FICO
scores, though they are not the same thing, and the algorithms used to
calculate them differ.
advantage over FICO is that the information it provides is more 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 person has owed
for a decade or longer—and analyze how that person managed that debt. It is
possible that FICO's algorithm can give an ideal borrower the same FICO score
as someone who is a high credit risk.
disadvantage of Experian is that, unlike FICO, it is rarely used as a
standalone tool to make credit decisions. Even lenders who review credit reports
in detail rather than going off a borrower's numerical score generally look at
all three bureaus, not just Experian. Consequently, borrowers should
periodically review all three credit reports to keep an eye out for erroneous
or derogatory information.
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. If a borrower
who five years ago paid
his or her credit card bill late applies for a loan, a lender
reviewing his or her Equifax report can pinpoint the exact month of the late
payment. The report also indicates debts owned by collection agencies and liens
against the borrower's assets.
offers numerical credit scores that range from 280 to 850. The bureau uses
similar criteria as FICO to calculate these scores, but as with Experian, the
exact formula is not the same. However, a high Equifax credit score typically
indicates a high FICO score.
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.
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