If you think that your credit score is the number that the three major crediting bureaus report—Experian, TransUnion and Equifax—and that these are the numbers that are used to determine your credit worthiness and risk, get ready for a big surprise. Ultimately, these numbers are not the numbers that help establish loan terms and interest rates according to the CFPB website. Instead, your FICO score is the marker that banks and lenders use to determine your loan rates and other terms. And while Experian uses FICO for its scoring, the agency uses an older version of the credit algorithm.

Could your credit score rise with Fico's new algorithm infographic


Understanding FICO

Most consumers have no idea what determines their score or how they can improve the number. So what is FICO exactly and how is the number calculated? FICO is an acronym for the Fair Isaac Corporation, which is the company that developed the scoring algorithms as well as financial software. How the number is calculated is a bit of a deep dive, because the algorithms for calculating a FICO score are constantly evolving.

In 2014, the New York Times reported that FICO’s new scoring model would now give less weight to medical debt and also would not punish consumers for collection account debts that have been paid. For many Americans, medical debt accounts can wreak havoc on credit scores and, according to an article by USA Today, this source of debt is the leading cause for many to seek relief through bankruptcy.

FICO Score 9 was ultimately the version that improved upon the reporting of medical debt collection and how such debt factored into risk assessment. Not only did the updated version improve scores because of medical debt, but it also provided positive bumps to renters who paid on time. However, FICO reported that FICO Score 8 was still widely used even in 2017.

In March 2018, FICO announced new changes to the algorithms with the introduction of FICO Score XD 2. According to the company, FICO Score XD launched in 2016, and the new version includes updates that may benefit consumers who “were previously unscorable based on their traditional credit data alone.”

FICO: Just like an Iphone?

Confused, yet? To understand the system, you need to view the algorithms a bit like we view technology. Each year, new models of every phone and tablet are released. Some changes are better, but not everyone upgrades to the new version even if the updates become savvier and more in tune with the consumer’s needs. The same is true for how credit scores are calculated. As the algorithm changes, there may be more positive points for those whose credit needs the extra nudge. This is great news, but there is more to the scoring story.

Here’s where the system gets tricky. Not every lending institution or bank uses the same version of FICO. While consumers typically receive scores from the top credit reporting bureaus, Forbes reported that, per the Consumer Financial Protection Bureau (CFPB), those scores don’t necessarily drive lending decisions. Experian notes on its web site that it uses FICO Score 8, which, again, is not the latest algorithm that considers medical debt. So when you see your Experian score, you need to take this into account. Equifax and TransUnion allegedly calculated scores differently, and the CFPB took action against Equifax and TransUnion.

The press release from the CFPB included the following quote from the Bureau’s director Richard Cordray:

“TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises,” said Cordray. “Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them.”

The press release also noted the following:

“No single credit score or credit score model is used by every lender. Lenders use an array of credit scores, which vary by score provider and scoring model. The scores that TransUnion sells to consumers are based on a model from VantageScore Solutions, LLC. Although TransUnion has marketed VantageScores to lenders and other commercial users, VantageScores are not typically used for credit decisions. Scores Equifax sold to consumers were based on Equifax’s proprietary model, the Equifax Credit Score, which is an “educational” credit score that also is typically not used by lenders to make credit decisions.”

So before you overanalyze your credit scores, here is what you need to know about how your lender or bank determines your credit worthiness and how you can improve your standing:

Medical Debt

You cannot be certain your bank or lender is using FICO Score 9 or higher, but there are things you can control. This means that if you have medical bills that are due—and have NOT gone into collection—you need to work with your hospital or healthcare provider to make payment arrangements that fit your budget. Or see if you are eligible for financial assistance. Many hospitals aid families that fit certain guidelines, and this is a much better option for your credit that dealing with a creditor.

Mortgage Payments or Car Payments

Payments that are made on-time show a positive rise to your credit score. Make these payments on time as often as possible. Many lenders will give you a grace period for payments, but don’t push their graciousness. Any payment that shows up 30 days past the due date may negatively impact your score. However, some lenders don’t ding your credit until 60 days. The best advice is to avoid hitting the 30-day mark.

Credit Cards

Too much debt on your credit cards may label you as a risk to lenders. According to an article from CBS News, 30 percent of your FICO score is based on “debt utilization.” This means that lenders are looking at how much of that credit line you are using; if you max out your card, your score will take a hit. Use credit for emergencies, not for daily living or for luxury splurges unless you can afford to pay that balance off.

Credit History

FICO scores also consider your credit history. This is all about how long you’ve had credit extended to you. A longer credit history will bump up your score. According to myFICO, this category accounts for 15 percent of your score.

Payment History

Every bill should be paid on time if you want a glowing FICO score. Yes, loan payments are a priority but so is every other bill. Your FICO score is impacted dramatically by paying bills on time. myFICO reports that payment history accounts for 35 percent of your FICO score—the largest percentage of all.

Mix It Up

A mix of credit is the best kind of credit, according to myFICO. Your score depends on having a quality mix of credit; lenders don’t want to see 10 credit cards. Instead they like to see mortgage loans, installment loans, and other types of credit. myFICO notes that this category accounts for 10 percent of the score.

New Accounts

Securing too many accounts in a small amount of time hurts your credit. According to myFICO: “Research shows that opening several credit accounts in a short period of time represents a greater risk-especially for people who don’t have a long credit history.” Don’t open too many cards or too many loans at once! This area accounts for 10 percent of your credit score.

How TransUnion, Equifax & Experian Can Help

While using scores from the three major agencies won’t always mirror your FICO score, Experian, TransUnion and Equifax can offer some benefits. Reports generated by the agencies can alert you of identity theft or even accounts that have been turned over to collection. Maybe you forgot to pay a bill several months ago and suddenly a ding appears on your credit. The reports may help you spot these blips so you can deal with them before your scores are seriously jeopardized. If you spot a fraudulent account on your report, you can begin the process of appealing the account and repairing your credit. You also can freeze your credit accounts or monitor your credit through all three agencies.

When applying for a loan, a line of credit or a mortgage, lenders and banks will look to FICO to determine your creditworthiness and risk. Lenders do not rely on the three reporting agencies, and you may have no idea which version of FICO determines your fate. While none of the credit reporting agencies can tell you the exact credit score determined by your bank, these agencies can give you a little insight into your credit. All three reporting agencies can help you spot fraudulent accounts, freeze your credit or monitor your credit, and these services may help you take efforts to boost or repair your score.

You are the biggest factor in your credit score, however. Pay on time, don’t max out your credit, never open numerous accounts in a short period of time, mix up your credit options and understand that a long (and good) credit history can give your score a bump.

Now that you understand how your score is calculated and what factors can lower or increase that number, you can take control of your credit and boost your financial marketability.