FICO Scores vs FAKO Scores: Differences and Correlations

Review of: FICO Score
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FICO Score
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On February 17, 2014
Last modified:February 17, 2014

Summary:

Understand the different types of credit scores and the differences and correlations between FICO credit scores and FAKO credit scores. Also keep in mind that the credit scores individual purchased from credit reporting agencies, whether they are FICO scores or FAKO scores, are different from the scores the agencies sold to creditors.

If you are using one of the free credit score reporting services, such as those from Credit Karma and Credit Sesame, then you know what you get isn’t FICO scores that were developed by Fair Isaac Corporation and are by far the widely used scores by creditors in determining a borrower’s credit worthiness. Those, also commonly known as FAKO scores, are scores developed by three credit reporting agencies, Equifax, Experian, and TransUnion. There’s also a VantageScore that was jointly developed by the three agencies. While FAKO scores can be obtained for free, through such programs as Credit Karma and Credit Sesame, FICO scores, including various versions of FICO scores, are usually available for purchase from either FICO or the three agencies (it’s possible to get FICO score for free, but it usually involves a trial of products, credit score or credit monitoring service, that are not free).

I am using both Credit Karma (TransUnion TransRisk Score and VantageScore) and Credit Sesame (Experian Plus) as tools to monitor my credit scores for free. Knowing that I am only getting FAKO scores from these free services, I only use them for references, tracking the changes of scores rather than absolute numbers of the scores. But if these FAKO scores don’t mean too much in the real-world situations, such as when applying for a mortgage or getting a new credit card, why are they still being sold by the agencies? Does knowing one’s FAKO scores help him or her understand where he or she is in the FICO score? Is there any correlation between FICO scores and FAKO scores?

If you have these questions and want answers to them, there’s a good resource for you. The Consumer Financial Protection Bureau (CFPB) recently published a study on the differences between scores purchased by consumers from three credit reporting agencies (including both FICO and FAKO scores) and those scores sold to lenders by the same agencies, as well as differences between FAKO scores (called educational scores in the study, including Equifax Credit Score, Experian Plus Score and TransUnion TransRisk Score, I have written about credit score types and ranges before), FICO score and VantageSocre and the correlation among them. The published report also explains different types of credit scores and their corresponding score ranges.

FICO credit score and default risk
I am still studying the report since it has a lot of good information, but there are a couple of charts in the report that I want to share with you first. The first one the relationship between FICO score and the risk of default, as shown above. Basically, what the study found is that “at the low end of the score range the risk of default is very high and the relationship between score and risk is fairly steep, while at the high of the score distribution, where risk is very low, the relationship is fairly flat”. For FICO score, the median is 714. If you are doing peer-to-peer lending using Lending Club, for example, you may want to pay a closer attention to the borrower’s score and see where it is in the default/score chart.

FICO and FAKO credit score correlation
The second chart is score correlations among FICO, FAKO, and Vantage scores. As you can see from the table, even though we may not care too much about FAKO scores, there are actually strong correlations between FICO and FAKO as well as FICO and Vantage scores, 90% or more overall. This is particularly true for scores at the lower end, those scores below the median scores (FAKO scores median is 712 and VantageScore median is 750). What does it mean? Well, if a person has a low FAKO score, it’s very likely that the FICO of the same person will be as bad. On the other hand, if the person has a very high FAKO score, he or she may not have a FICO score that is as good as the FAKO score because for scores above the median, the correlation is weaker and the variation is greater. So don’t get too excited if you have a 990 VantageScore, as I do according to Credit Karma :)

Understand the different types of credit scores and the differences and correlations between FICO credit scores and FAKO credit scores. Also keep in mind that the credit scores individual purchased from credit reporting agencies, whether they are FICO scores or FAKO scores, are different from the scores the agencies sold to creditors.

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2 Responses to “FICO Scores vs FAKO Scores: Differences and Correlations”

  1. John |  Oct 05, 2012 at 9:30 am

    I am surprised by the strong correlation between FAKO and FICO scores.

  2. Kevin@Savvy on Credit |  Oct 17, 2012 at 5:22 pm

    You asked an interesting question that was not directly answered: “why are FAKO scores being sold by the agencies?”

    The answer is simple – royalty payments to Fair Issac. Each time a credit bureau report is sold with a FICO score, the lender pays the bureau, and the bureau sends a fee to Fair Issac.

    The three bureaus compete fiercely for business, often on price. As prices dropped, the bureaus revenues dropped, but the royalty payments to Fair Issac stayed the same.

    The bureaus created an alternative score – one that was bureau independent – so they could get out from under the FICO induced downward death spiral of falling profit margin.