How does your credit score look?
Information about finances is important. It turns out there are actually multiple ways to calculate a credit score and no single formula.
Credit scores are simply a way for lenders to determine the risk involved in granting you a loan by distilling all your credit history into a number.
FICO and VantageScore are two of the most common ways to estimate it. The purpose of this article is to explain how these two variables can affect your attempt to build good credit.
Credit Scores – what are they?
A credit score is a three-digit number, ranging from 300 to 850, that describes a person’s creditworthiness and is calculated based on many different models. You may be able to qualify for better interest rates if you have a good credit score since you are more likely to qualify for new credit accounts with higher credit limits.
All three major credit bureaus report information about your debt – such as the types of credit you’ve used, your payment history, and the amount of debt you owe.
A lender can request a report from one of the bureaus when you apply for a new loan or credit card. Once the data has been analyzed, your credit score is calculated.
Despite this, each bureau gathers and stores your credit data differently, which can result in a different score from one bureau to another.
The Credit Scoring Models
Consumers and lenders alike are most commonly provided with the FICO Score and VantageScore models, although the type of score that is tested depends on the financial institution.
Over 90% of the country’s top lenders use the FICO model, which ranges from 300 (poor credit) to 850 (exceptional credit).
FICO is a model developed by the Fair Isaac Corporation, and the two biggest secondary mortgage companies in the United States, Fannie Mae, and Freddie Mac, started using it in 1995 to determine if a loan applicant was a credit risk.
FICO scores are available in more than a dozen variations. Developed in 2009, FICO8 is the most widely used score among lenders. Other versions are used for different purposes.
For example, FICO Auto Scores are for auto loans, and FICO Bankcard Scores are used for credit card applications. In 2019, a new version of the general FICO score called FICO9 was released, but most creditors still use FICO8.
The FICO8 Score Ranges
- 350-579: Very Poor Credit
- 580-669: Fair Credit
- 670-739: Good Credit
- 740-799: Very Good Credit
- 800-850: Exceptional Credit
Scores calculated by FICO are closely guarded, but consumers can improve their scores by learning the weight of each component.
The Components of a FICO8 Score
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
FICO Score: How to Get It
Several options are available to you here. If you have a credit card statement, you can check your FICO Score. Some issuers (Bank of America, Discover, and Citibank, for example) offer their customers their scores for free every month. Additionally, Credit Nerd provides a free FICO Score from Experian.
Despite what your Experian FICO Score may say, that does not guarantee that the other two bureaus will report the same.
As an alternative to FICO, this is another major credit scoring model developed by the credit bureaus themselves in 2006. Like FICO, Vantage has a range of 300 to 850 (poor credit to excellent credit) and several versions exist. Several lenders, including credit card companies, are currently using VantageScore 3.0 as the standard.
VantageScore is the only one that allows you to get a credit score even if you have a very short credit history (as little as one month). To be visible to FICO’s algorithm, you must have six months of data.
The range of scores also differs slightly.
The VantageScore 3.0 Ranges
- 350-630: Poor Credit
- 630-690: Fair Credit
- 690-720: Good Credit
- 720-850: Excellent Credit
VantageScore 3.0 is also based on weighted estimates, just like FICO8.
The Components of VantageScore 3.0
- Payment history (40%)
- Depth of credit (21%)
- Utilization (20%)
- Balances (11%)
- Recent credit (5%)
- Available credit (3%)
Payment history is a key factor in both models, so if there’s one thing you want to ensure is that your payments are made on time, that would be that.
How to Get Your VantageScore
Similar to FICO (are you beginning to see a pattern? ), there are several ways to approach this.
Your financial institution is the first option. There are several banks that offer free credit scores each month, including Chase Bank, Capital One, and OneMain Financial (provided by TransUnion) and U.S. Bank (provided by Experian).
As a way to monitor and manage your finances without any strings attached, Credit Nerd provides your VantageScore 3.0 for free, courtesy of TransUnion.
FICO score and VantageScore aren’t always equal, even if many people have similar scores. As a matter of fact, they can differ by almost a hundred points because of the differences between the models.
As long as you keep track of at least one of the main scoring models, you ought to be able to get a feel for where you stand.