How Accurate are FICO Credit Scores?

The credit scoring industry is a billion-dollar industry, maybe more! You might wonder if a credit score is even necessary and what they are used for. They are important to have and to build, especially when you are looking to buy a home! A credit score is used by lenders to help determine the level of risk when extending a loan or line of credit. It is used to measure how likely you are to repay borrowed money based on your credit history. Credit history is influenced by factors such as payment history, credit utilization, length of time credit accounts have been open, and recent credit inquiries. 

Credit scores typically range from 300 to 850. The higher the score you have, the “better” the score you have. Typically, lenders want to see a higher credit score, in order to qualify you for a loan program that would work best for you. That and, you do typically qualify for a lower interest rate with a higher score, but it depends a bit on the loan program (VA/Conventional/USDA Rural Development/FHA) as well as the lender you use. In the mortgage world, 640 is often the lowest score a lender can use to qualify a mortgage applicant.  So you can understand why you want to know your score and stay on top of it! 

We have people asking us all the time how they can find out what their credit score is, and if pulling a credit score or checking their FICO score on their credit cards is accurate, or if it hurts their credit to check it. 

Let’s talk about the difference between looking at something like the score your credit card provides, and when lenders do a hard credit pull. How accurate are the FICO scores? Does it hurt your credit to look? 

“Soft Credit Pull” vs. “Hard Credit Pull” 

First, let’s go over the different sites and institutions where you can check your credit score that would be considered a “soft pull,” also called a “soft inquiry.”  Soft pull credit information is what you get when accessing credit score data from Credit Karma, Equifax, Experian, TransUnion, My FICO, the score your credit card or bank gives you, etc.

A hard pull, also called a “Hard Inquiry,”  is when a lender pulls a credit score to allow them to extend credit to a borrower. A hard pull can happen when you apply for a mortgage, an installment loan (car or student loans for example), or credit cards. Lenders pull those scores from a credit scoring agency that may use different FICO models across the industry. 

What is “FICO?” Is it Accurate?

FICO is the Fair Isaac Corporation, a business that has the proprietary technology of credit scoring algorithms most credit scores are based on. As they roll out new and more advanced models, it’s a new FICO model.

Usually, when a lender pulls a credit report they don’t even know what FICO model they are using. Sometimes it’s a different model for the Experian, the TransUnion, or the Equifax scores all on one credit report.

This helps to explain why every time you look at your credit score, or your lender pulls your credit score, it differs. Based on the fluctuations of all of the different factors that can make up your credit score on a day-to-day basis, you get different results depending on the day and the model. Did you pay your credit card bill in full? Did you max it out? Did you forget to pay your bill? Did you open or close a line of credit? Did you have a late payment? Did you have a new collection? All of those things affect the numbers and can cause them to move up or down from day to day.

It’s important to realize that the soft pull scores you monitor on a weekly/monthly/quarterly basis are great indicators of the pattern and are directionally accurate, not necessarily point-for-point accurate. If you are watching to make sure there are no large dips, no fraud, and that it’s generally trending in a positive direction, then it’s a good tool. You want to keep your scores as high as possible, of course, but sometimes life happens and it dips. Don’t check it every day or rely on it as 100% accurate down to the number!

Does a “Soft Pull” Affect Your Score? Does a “Hard Pull?”

Soft credit pulls do not affect your score. While you don’t necessarily have to check them super super often if you are following best credit practices,  since they are not point-for-point accurate, it won’t affect your score if you do. If you are monitoring on a semi-regular basis for major swings and trends, and to make sure you’re headed in the right direction, you can do so without worrying about how it is affecting your score! 

In most cases, one or two hard pulls are unlikely to affect your credit score in a meaningful way, but hard pulls in general can negatively impact scores, especially if there are multiple in a short period. This, however, depends on the inquiry. An inquiry for a credit card is more impactful than other inquiries and you have almost no impact for mortgage inquiries. 

Hard credit checks usually stay on your credit report for about two years, but any negative impact on your score would likely drop off or decrease before then unless you have multiple hard pulls on there. This is why it’s important to think twice before applying to multiple credit cards back to back, because multiple hard pulls in a row could lead to a lower score for longer, and could indicate to lenders that you may be a riskier applicant. 

If you notice a hard pull on your credit that you don’t remember authorizing, it could be a sign of identity theft, and you can dispute it with the credit bureau. Other than that, hard pulls that you authorize generally take around two years to fall off your credit reports. 

Credit Score Best Practices

If you are just starting with credit, or are trying to increase your score, there are things you can do to raise your score and keep it high. You can check your progress using the free credit score checkers, as long as you aren’t relying on them for 100% accuracy.

First, get a credit card if you don’t have one, and be responsible with it. Keep it open forever because the longevity of a credit line helps your score— in fact— you should never close revolving accounts as it will lower your score. 

Once you have your card, never max it out, and do not go over 30% of your credit limit, even if you are paying it in full each month. This could be considered negative behavior and will tick your score down. Using a minimal amount and paying it off on time will reflect a higher score. The utilization percentage, and not getting too close to your credit limit each month is very important to the FICO algorithm. 

Next, pay your bills on time, every time! Last, if you have a collection to pay off, make sure it is deleted and removed when you do, not just moved to 0 dollars owed. It needs to be closed completely to not count anymore! 

Takeaways

Using one of the free credit score checkers is considered a soft pull, and is safe to do without hurting your credit score. However, it is important to note that because the factors that make up your score are constantly fluctuating, these scores are not point-for-point accurate. If you have any questions about your credit score or more advice for how to raise your score, reach out to us, we love to help!

If you are interested in buying a home soon and are curious about the process of pre-approval and your credit score, reach out to us to get the process of approving you for a home loan rolling!