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What Is a FICO Score? What Is a VantageScore?

| Money Rates Columnist
min read

credit-score-laptopWhat is a FICO score? What is a VantageScore? How are they different and how do those differences affect your borrowing?

When it comes to credit scores there's FICO and VantageScore. One is the long-time leader in the field while the other is a newly-emerging competitor. This competition is good for consumers because it will encourage efforts to get the best possible scoring models.

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What Are Credit Scores?

A credit score is a reflection of what appears in your credit report. It takes the entries that show up in your credit statement and converts them into a three-digit number. Statistically, the higher the score, the less likely the consumer is to default on a loan.

Many lenders use credit scoring as a quick and dirty alternative to underwriting the old-fashioned way. Instead of verifying employment, examining bank statements and checking references, credit departments may merely check credit scores and grant (or decline) loans.

Others use credit scoring to demonstrate that their underwriting policies are non-discriminatory. By applying the same guidelines to all applicants and basing decisions on minimum credit scores, they avoid running afoul of Fair Lending Act provisions. The most popular of such systems are FICO and VantageScore.

What Is a FICO score?

The FICO scoring system was established in 1956 by Bill Fair and Earl Isaac. FICO's founders designed it to introduce more fairness into the lending system by creating an objective measure of creditworthiness.

The FICO system comprises five factors.

  • Payment history (35%)
  • Level of debt (30%)
  • Age of credit history (15%)
  • Types of credit (10%)
  • Credit inquiries (10%)

One of the most important aspects of the FICO credit scoring system is that borrowers have the ability to raise or lower their scores. If you pay bills in full and on time your payment history can be improved. Higher scores translate into lower interest rates and that means small monthly bills.

What Is a VantageScore?

VantageScore was developed by the three largest credit reporting agencies (CRAs), Equifax, Experian, and TransUnion. Established in 2006, the model is operated by VantageScore Solutions.

The VantageScore 4.0 system relies on five factors when evaluating credit reports.

  • Total credit usage, balance and available credit (extremely influential)
  • Credit mix and experience (highly influential)
  • Payment history (less influential)
  • Age of credit history (less influential)
  • New accounts (less influential)

vantage

FICO Score vs VantageScore: What's the Difference?

If you get your credit score from different sources, you'll discover that the information you receive is likely to differ. This is not because one number is somehow "wrong" or "right," but because there are different scoring systems and different versions of individual scoring systems. In fact, some of us have over 50 scores!

If we look at the two major scoring systems, several important differences stand out.

First, with the FICO system, payment history is the most important factor. While for VantageScore, it's "less influential" and third in importance.

Second, the importance of individual factors is sometimes shown online as a percentage. However, as VantageScore told us, "How much any category impacts your score is dynamic and based on what your credit profile is like. For example, if you have only one credit card with pristine history (no missed payments), then a single missed payment might have a greater impact than if you had multiple accounts and multiple missed payments.

"Those pie charts are national averages. Basically they look at a sample of credit profiles, and average out what impacted the group as a whole…but those percentages should not be taken personally, as in, my credit score is impacted by missed payments by % percent."

The two models have different numeric ranges. The chart below illustrates them.

vantagescore

What's Not Included in Scoring Models?

Credit scores are widely misunderstood. For instance, they do not include your salary, occupation, title, employer, date employed, age or employment history.

That's right. Income is not a factor when looking at creditworthiness. The fact that someone has a lot of money does not mean they pay bills on time. Alternatively, the fact that someone has a small income does not mean he or she pays her bills late.

However, studies have shown that those with higher incomes tend as a group to have higher scores, probably because it's easier to pay your bills on time when you have a bigger financial cushion against emergencies. And while you don't receive higher credit scores simply for being older, older consumers tend, as a group, to have higher scores because the length of your credit history is a factor.

VantageScore Treats Inquiries Differently

Credit inquiries, in which a company pulls your credit report because you're seeking credit, cause your score to drop by about five points each. As of this writing, the VantageScore treats credit inquiries differently than the FICO score. This is especially important when you're shopping for a personal loan, credit card or other unsecured financing.

FICO scoring combines multiple inquiries when you shop for certain types of loans - a mortgage, student loan or auto financing. It treats multiple credit inquiries in the same category as just one. As long as they occur during a limited time, which can be 14 to 45 days, depending on the FICO version you're working with, your FICO score only hits your score once.

Note that FICO does not cut you the same slack with other types of financing. Every inquiry for a personal loan or credit card does some damage. For this reason, don't allow anyone to pull your credit report when shopping for a loan before you choose a lender and apply.

VantageScore looks at inquiries differently. All inquiries for loans in the same category within 14 days are treated as one. So if 10 personal loan vendors check your credit, the VantageScore only deducts one from your credit score.

FICO Score or VantageScore: Errors Can Cost You

All credit scoring systems depend on the data extracted from credit reports. It follows that if the information in the report is incorrect or out-of-date that credit scores can be significantly damaged.

Credit report errors do happen and they do result in lower scores. The Federal Trade Commission has reported that "one in five consumers had an error on at least one of their three credit reports." About 5% of the credit reports which were checked had errors which could result in score reductions of at least 25 points. Worse, a few reports had so many errors that scores were cut by more than 100 points.

It turns out that there are several keys to getting the best possible credit score. It obviously makes sense to pay all bills in full and on time. But, in addition, consumers need to check their credit reports for errors and items which are out-of-date, generally items at least seven years old.

The good news is that by going to AnnualCreditReport.com you can get one free copy of your credit report every 12 months from each of the three major credit reporting agencies (CRAs): Equifax, Experian, and TransUnion.

FICO Score and Bank Accounts

Credit scoring systems evolve over time. For example, the reporting of judgments, liens, and medical bills has changed in recent years.

The latest innovation is bank account monitoring. The way you use your bank account can be tracked electronically with the UltraFICO and Experian Boost programs, but only with your approval. Bank monitoring may result in higher credit scores, something especially important for those trying to get into a higher credit category.

According to Fair Isaac, "Seven out of 10 consumers who exhibit responsible financial behavior in their checking and savings accounts could improve their score."

For those with marginal credit scores, the new programs might help you get better financing. Alternatively, if privacy is a concern, then maybe bank monitoring programs are not for you.

Rents, Utilities, and Credit Scores

Most people make a point of paying their rent and utilities on time. The reason is very practical. Nobody wants to be evicted or face the gloom of a cold night without electricity.

But there's a problem. Credit reports traditionally do not include information regarding utility and rental payments. All those full and on-time landlord and electricity payments are not helping your credit score.

Rent and utility information is now beginning to show up in credit reports. The Experian Boost and UtlraFICO systems are both designed to include rent and utility payments. That means on-time monthly payments can increase credit scores. For more information and details speak with Experian Boost and UtlraFICO representatives to understand how each program works.

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