A credit score can sometimes seem like a mythical creature. In what land does it live? What powers does it have? And what kind of wizard created it?
In reality, credit scores are derived from credit-scoring models — that is, formulas that calculate our creditworthiness and then assign a numerical value to it. If this still sounds like magical gibberish to you, let’s make it simpler.
We’ve all got three-digit credit scores based on our borrowing and payment history. Most of us think we have just one. In fact, there are hundreds of credit-scoring models in use today. Each credit score uses slightly different criteria to cater to different lenders and businesses.
It’s not feasible or even necessary to know about every score since you may never encounter some of them. But there are two scoring models that are the most common and therefore important to understand: FICO and VantageScore. When you think of your credit score, chances are good you’re thinking about one of these.
While these two scoring models use similar criteria and are often seen as direct competitors, there are some differences. Let’s discuss what goes into FICO and Vantage credit scores and how they differ from each other.
All about FICO
The first FICO (Fair Isaac Corp.) scoring system was established in 1958, with its first credit bureau risk score introduced in 1981 and made available to the largest credit bureaus in 1991. Since then, the FICO score has become the gold standard for many lenders when assessing credit risk.
FICO scores are commonly used for major purchases such as home mortgages and car loans, but are also widely used for other types of credit and loans as well.
A FICO score is a three-digit number ranging from 300 to 850 (a newer version reportedly goes up to 950), with 300 at the low or “poor” end and 850 at the high or “excellent” end. A FICO score above 670 is generally considered good. If your score is in this range, you can probably get approved for loans and get reasonable and even low interest rates. On the other hand, anything below 670 is considered a bad credit score and makes it harder to get a reasonable interest rate. And a very low score — usually at or below 600 — means you could be denied a loan altogether.
FICO uses five different categories to calculate the score. Here’s a breakdown by percent:
- Payment history (35 percent): your history of repaying your debts in full and on time
- Amounts owed (30 percent): your ratio of available credit to how much credit you’ve used
- Length of credit history (15 percent): how long you’ve had active credit accounts
- New credit (10 percent): how much new credit you’ve applied for
- Credit mix (10 percent): the mix of credit you have, such as credit cards, car loan, student loan, etc.
Since payment history matters the most in a FICO score, it’s always in your best interest to make all your payments on time and in full.
All about VantageScore
VantageScore was established in 2006 by the three credit bureaus — Experian, TransUnion, and Equifax — to provide “a more consumer-friendly alternative” to the FICO score. VantageScore takes into account some non-traditional information and gives less weight to certain factors than FICO does, but hasn’t yet reached FICO’s popularity.
Just like FICO, a VantageScore is three digits. The newer version — VantageScore 3.0 — ranges from 300 to 850 as well, with the lower end signaling poor credit and the higher end signaling excellent credit.
VantageScore uses six categories to calculate its score. Here’s a breakdown by importance:
- Payment history (very high): your history of repaying your debts in full and on time
- Age and type of credit (high): both the length of your credit history and the mix of your credit
- Percent of credit limit used (high): similar to “amounts owed” in FICO, or the ratio of available credit to how much credit you’ve used
- Total balances (medium): your total current and delinquent debt
- Recent behavior (low): similar to “new credit” in FICO, or how much new credit you’ve applied for
- Available credit (low): your available credit line
Just like with a FICO score, it’s important to your VantageScore to make your payments on time. But the percentage of your credit limit you’re using carries a lot of weight, too. Make sure to keep that ratio in the recommended 30 percent or less range.
How FICO and VantageScore are different
There are several important differences between the two credit scores that may impact you:
- You often have to pay for a FICO score, while a VantageScore can be accessed for free.
- If you’ve only been building credit for a short time, you may not have a FICO score, but you’ll likely have a VantageScore. That’s because VantageScore will consider other data beyond the main categories listed above, such as rent and utilities payments. And VantageScore only considers the last 24 months of activity.
- FICO considers paid collection accounts as part of your credit risk, while VantageScore does not.
- VantageScore only lets you rate shop for 14 days for a mortgage or car loan, while FICO gives you 45 days.
- VantageScore takes into consideration the effects of natural disasters.
- FICO is the only credit score approved by Fannie Mae and Freddie Mac when it comes to getting a mortgage.
Know your credit score
It’s a good idea to check your credit report yearly, not only to know what your score is and if you need to make improvements, but to catch any errors. Inaccuracies and old information can often be found on credit reports and adversely affect your credit score. If you need help finding and addressing issues that could be damaging your score, talk to a credit repair service.
And remember that while there are many credit scores out there, understanding at least the basics of FICO and VantageScore will help you know how to earn and keep good credit. Making all your payments on time and keeping your credit balances low are positives for both your FICO and VantageScore numbers.
If you’d like a free review of your credit report and and personalized credit assessment, contact CreditRepair.com today.
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