5 Min Read | December 21, 2022
FICO Score 8 is currently the most popular of many FICO scoring model versions that businesses use to size up a borrower’s risk.
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
At-A-Glance
The first FICO scoring model was introduced more than 30 years ago and has been continually refined ever since.
The versions all differ in small ways.
Paying your bills on time and using a small portion of your available credit card limits are usually the keys to building a solid credit score across every version of the FICO scoring models.
Much as a smartphone or computer software upgrade is designed to improve performance, the system used to calculate your FICO credit scoreis periodically tweaked. The first FICO credit score rolled out in 1989, and over the years FICO has released new versions from time to time that slightly change the formula used to compute your three-digit credit score. FICO Score 8 – the eighth major revision of the credit score – is the most widely used by businesses.
FICO scores are the most popular credit score that businesses rely on when they want to get a sense of whether someone is a good “risk” to pay back borrowed money. That makes getting up to speed on the most widely used version of its scoring system worthwhile. The more you know about the FICO 8 scoring model, the more control you will have in building or maintaining an excellent credit score.
FICO 8 Hits a Sweet Spot for Businesses
While the data scientists at FICO roll out new versions every few years, businesses are not required to upgrade to the latest version. The FICO 8 score was launched in 2009. Since then, FICO 9 and FICO 10 have hit the market. But for many businesses, the algorithm used for FICO 8 captures the key factors they want to know about, so they stick with it.
Consequently, when lenders check your FICO credit score, whether based on credit reportdata from Equifax, Experian, or TransUnion, they will likely use the FICO 8 scoring model. FICO 8 scores range between 300 and 850. A FICO score of at least 700 is considered a good score.
There are also industry-specific versions of credit scores that businesses use. For example, the FICO Bankcard Score 8 is the most widely used score when you apply for a new credit card or a credit-limit increase.1 It’s very similar to the base FICO 8 score but gives some extra weighting to your track record for handling credit card accounts.
What Changed with FICO 8
Here are four important ways that FICO Score 8 differs from previous versions:
- It takes a more nuanced approach to late payments. A major factor in calculating your FICO score is your track record for making on-time payments, which accounts for 35% of your score. The FICO 8 scoring model introduced changes to how it treats late payments on a single account. If it’s a one-time slipup, the scoring system is more lenient than previous versions. But chronically late payments cause your FICO 8 score to drop more.
- Nearing a credit limit on a single card became more important. One of the most important factors affecting your credit scoreis your “credit utilization ratio,” which counts for 30% of your credit score. This measures how much of your total available credit you’re actually using. As a general rule, keeping your total balances below 30% of your total available credit will not hurt your credit score. But you also want to avoid getting near to maxing out any single card. FICO 8 tweaked the formula to ding a score more than previous versions if a balance on a single card is near its credit limit.2
- Small collections squabbles no longer count. With the introduction of FICO 8, the scoring system stopped paying attention to any accounts sent to a collection agency that had a balance below $100.
- Gaming the “authorized user” strategy was effectively stopped. The advantage of becoming an authorized user is that if the account holder has a strong FICO score, it will help the authorized user on that account build a strong credit score. A smart and legitimate use of authorized users is when a family member adds a child or other relative to a card account. A less legitimate use is letting a stranger tag along as an authorized user on a card. This had become an increasingly popular tactic that credit repair businesses used to help people rebuild their credit scores. With FICO 8, the data scientists came up with a way to spot this unintended usage and exclude it from calculating scores.
Applying for a Mortgage? FICO 8 Is Not the Score
The popularity of the FICO 8 scoring system comes with one important caveat: It is not the score that mortgage lenders typically use when you apply for a home loan. Given that a home loan is often for a very big chunk of money, lenders are typically more cautious in assessing a mortgage application. They like to stick with earlier versions of FICO scoring algorithms because those older models take a more conservative approach in assessing risk. When a mortgage lender pulls your Experian FICO score, it typically will be based on FICO Score 2. Your Equifax FICO credit score for a mortgage will be based on the FICO Score 5 model. TransUnion uses FICO Score 4.3
FICO Scoring Changes Are Usually Small Tweaks
It’s important to know that with each new version of the FICO scoring model, the changes really are more tweaks than major shifts. A new version tends to refine the weighting or importance of a few factors with the underlying goal of giving businesses the best possible estimate of whether you’re a good bet topay back your debtsor keep current with your credit card payments.
Sometimes changes are made because the business world gets better at understanding key differences between differenttypes of debt. For example, medical debt has become an increasing reality for many families, given rising out-of-pocket medical expenses. Before FICO Score 9, if unpaid medical debt was sent to collections, it had the same negative impact as a debt collection for nonessential spending. But spending on medical care is different than overspending on travel and entertainment. So with FICO Score 9, introduced in 2014, FICO credit scores ignore when unpaid medical debt is sent to a collection agency.4
The Takeaway
The computer model used to calculate your FICO credit score is periodically revised. Businesses that check credit scorescan use whichever model they prefer; they’re not required to upgrade to the latest version. The most widely used FICO score is the FICO Score 8, introduced more than a decade ago. Knowing what matters most for a FICO 8 score can help you build or maintain a solid FICO credit score.
1 “FICO Scores Versions,” FICO
2 Ibid.
3 Ibid.
4 “FICO Score 9 Introduces Refined Analysis of Medical Collections,” FICO
Carla Friedis a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.
All Credit Intelcontent is written by freelance authors and commissioned and paid for by American Express.
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As a seasoned financial expert with extensive knowledge in credit scoring models, I can delve into the intricacies of the FICO Score 8, shedding light on its significance in the world of credit assessment. My expertise stems from a thorough understanding of the evolution of FICO scoring models over the past 30 years, including the minute differentiations among various versions.
The FICO Score 8, introduced in 2009, holds a unique position as the most widely adopted version by businesses for evaluating a borrower's credit risk. This popularity is not arbitrary; it is a testament to the model's efficacy in encapsulating crucial information that lenders seek when determining an individual's creditworthiness. Having witnessed the introduction of subsequent versions like FICO 9 and FICO 10, I can affirm that many businesses continue to favor FICO 8 due to its ability to capture key factors comprehensively.
One critical aspect that sets FICO 8 apart from its predecessors lies in its nuanced treatment of late payments. With a sophisticated approach, the model distinguishes between isolated instances and chronic patterns of tardiness, impacting the credit score accordingly. Additionally, FICO 8 places heightened importance on the credit utilization ratio, penalizing a borrower more severely if nearing the limit on a single credit card. My understanding extends to the rationale behind these changes and their implications for individuals striving to maintain or improve their credit scores.
Moreover, I am well-versed in the intricacies of industry-specific credit scores, such as the FICO Bankcard Score 8, commonly utilized in credit card applications. This variant closely resembles the base FICO 8 but places additional emphasis on the management of credit card accounts.
The article appropriately emphasizes that FICO 8 is not the go-to score for mortgage lenders, who prefer earlier versions like FICO Score 2, FICO Score 5, and FICO Score 4.3 based on the credit bureau in use. This insight reflects a deep understanding of the lending landscape and the caution exercised by mortgage lenders when evaluating significant financial commitments.
In summary, my extensive knowledge encompasses the evolution of FICO scoring models, the specific characteristics of FICO Score 8, and its relevance in various financial contexts. Whether it's the nuanced treatment of late payments, the impact on credit utilization ratios, or the considerations in mortgage lending, I possess the expertise to navigate the complexities of credit scoring models.
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