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Understanding Credit Scoring Models: FICO, Vantage Score & Credit Scores Effects

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Before a lender hands over a big loan, they want some reassurance that you’re willing and able to pay them back, with interest. Rather than simply take your word for it, they’ll obtain your credit score from a reporting bureau.

The value of that score will affect the terms of the loan you’re offered, including the interest rate. A good credit score will mean you get better loan terms and potentially save a ton of money in interest charges. Banks aren’t the only ones who are interested in your credit score. Landlords, insurance companies, credit card issuers can all potentially access your credit score to assess your creditworthiness and decide whether or not to do business with you. Since there are so many ways credit scores can affect your life, it’s important to understand what they are and how to manage them.

What Exactly is a Credit Score?

A credit score is a three-digit number that gives potential lenders a snapshot of your financial history in a nutshell. It’s derived by weighting various factors in your credit history. A higher number indicates greater creditworthiness. Your credit score is frequently recalculated as additional credit transaction history is analyzed and added to the score. Many people confuse credit scores and credit reports, but they are different things. A credit score is a single number. A credit report is a collection of credit-related data that a credit reporting agency has collected about you. Credit reports include records of loan payments, credit card balances, credit inquiries, and other credit transactions. A credit report can go on for pages. That’s a key reason that lenders prefer to use credit scores instead, because they sum everything up into a single number.

The Various Credit Scoring Models

Credit scores are provided by companies that specialize in analyzing financial history and assessing risk. Some scores are developed by credit bureaus and others are developed by outside agencies. Each credit score provider uses its own, unique formula to calculate credit scores, so your score will vary depending on the provider. The two most widely used models are FICO and VantageScore. When you apply for credit, you don’t get to choose which score is used. FICO is currently the go-to choice for most lenders, but VantageScore is gaining ground.

What is a FICO Score

The most widely used consumer credit score is the FICO score created by the Fair Issac Corporation. It’s calculated by taking into account five areas:

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of Credit History (15%)
  • New Credit (10%)
  • Credit Mix (10%)

The above weightings are general guidelines; the content of your personal credit file affects how much impact each factor ultimately has. For example, people who haven’t been using credit very long may have different weightings than those who have an extensive credit history. FICO scores range from 300 to 850. Scores above 650 are generally considered good, but higher is better.

What is a “VantageScore” Credit Score

VantageScore was launched in 2006 as an alternative to FICO. It’s calculated based on the following factors (from most important to least important):

  • Payment history
  • Age and type of credit
  • % of credit limit used
  • Total balances/debt
  • Recent credit behavior and inquiries
  • Available credit

Current VantageScore credit scores range from 300 to 850, just like FICO. A previous model used a different scale (501-990) but that’s no longer in use.

How To Check Your Credit Score

Under U.S. Law, you’re entitled to receive one free credit report per year from each credit reporting company. You can get these through the website annualcreditreport.com. The free reports do NOT include credit scores. To get your credit score, you have several options:

  • Get it from a credit card or loan statement: Many major credit card companies have begun providing credit scores on a monthly basis.
  • Use a credit score service: Some of these sites are free, others charge a fee or require membership.
  • Talk to a non-profit credit counselor: The counselor can often provide you with your score and help you understand it.
  • Buy a score: You purchase your FICO score at myfico.com. VantageScore does not offer this service, but that score is available through some credit score websites.

It’s important to note that there are three major credit reporting agencies (Equifax, TransUnion, and Experian), and each one may have slightly different data about you. Therefore, your VantageScore or FICO score as calculated based on your Experian file may be slightly different than your score based on your TransUnion or Equifax files, though they should be similar. Your credit score is a dynamic number, and it’s normal for it to change over time. It’s a good idea to keep an eye on it as part of your routine financial planning. Checking either FICO or VantageScore will do the trick, as the same behaviors influence them both.