It would be nice if all lenders and credit reporting agencies used the same credit scoring system. Unfortunately, they don’t, contrary to popular belief. The original FICO score was developed by Fair Isaac and Company (FICO) in the late 1950s as a numerical method of determining credit worthiness. A credit score attempts to condense a borrowers credit history into a single number. FICO scores range between 300 and 850 and are based on your past bill-paying performance.
The three major credit bureaus each have their own version of the FICO method: Equifax uses the Beacon system, TransUnion uses the Empirica system, and Experian uses the Experian/Fair Isaac system. Each system is based on the same premise, but they are all slightly different. Even if each credit bureau had the same information about you, word for word, the scores might be slightly different. Furthermore, lenders, who traditionally rely on credit bureaus for information about your credit, may also have their own credit-rating method based on it’s own set of customer data; some lenders do not even use credit scores.
So, since each credit bureau calculates your credit score differently, there has been an outcry for years from consumers and lenders for some type of uniformity. That is why VantageScore was created, however at the time of this update, multiple scores are still being used. We don’t see the "uniformity" as of yet.
Banks, lenders, and other firms which extend credit to consumers use credit scores to determine whether the person applying is a good risk or a bad risk for credit. Credit companies do this by using credit modeling, which analyzes certain key consumer indicators that tell creditors how you use credit and whether you are someone who might default on money you borrow.
In the past, most creditors used the Fair Isaac and Company method, more commonly known as FICO. For years, it has been the industry standard credit modeler, calculating FICO scores, a number between 300 and 850, with a higher number meaning you are a better credit risk, and a lower number meaning there is a higher chance you will default on money you owe.
Credit companies are starting to branch out and use additional credit scoring methods to get a more holistic view of its borrowers. One of the more popular credit models is called the Vantage Score. This is a model similar to the FICO score in the factors it considers, but the Vantage Scores range from 501 – 990. Here too, higher scores represent a lower likelihood of default.
Why Two Models?
Having two models gives credit companies a better understanding of risk and helps make the decision to extend credit (or to deny it) more clear. The two models are also different in how they weigh certain credit factors, which can mean different things to companies which offer different types of credit.
The difference between the two companies and its models is how the factors are weighted. Typically, credit modeling companies look at things like:
- Credit and payment history (do you pay your bills on time or are you constantly late?)
- Total amount owed
- Total credit line amounts
- Type of credit (loans, credit cards, etc)
- Age of credit (are all your accounts new or have you had credit lines for 10 years or more?)
In the FICO model, the most important factor in your FICO credit score is your payment history, which makes up about 35% of your overall score. That means your FICO score will largely be determined by whether you have made your recent payments on time and as agreed upon with the creditor.
With Vantage, the most important factor is Recent Credit, which is the number of recently opened credit accounts and credit inquiries you have on file. It accounts for approximately 30% of your credit score, here called a Vantage Score.
The Complete Vantage Model
In order of importance, Vantage considers the following things when calculating your score:
- 30% Recent Credit History
- 28% Payment History
- 23% Credit Limit Used
- 9% Total of Balances
- 9% Age and Type of Credit
- 1% Available Credit
Credit Limits Used
Recent credit history and payment history are considered paramount by both credit modelers, but after that, they diverge. In vantage, the percentage of credit limit you have used is a major factor in your credit score.
Here, the lower the percentage the better. For instance, if you have the ability to draw up to $20,000 across your credit cards and an outstanding balance of $16,000, that means you have used 80% of your available credit ($16,000 / 20,000 = 80%). That is a very high number and will reflect poorly on your Vantage score and draw your score down. Here, the percentage is key, not the overall credit. In comparison, someone with the ability to draw $100,000 who has an outstanding balance of only $5,000 will score better in this section because she has only used 5% of this total limit ($5,000 / 100,000 = 5%).
Total Credit Balance affects your Overall Vantage Score
The total of balances is the overall amount of money you owe. If you have a credit card with $5,000 outstanding, a home loan with $100,000 outstanding, and a car loan with $8,000 outstanding you have a total credit balance of $113,000. This is neither good nor bad, but when related back to the amount of credit you can draw at any given time, (the available credit limit), it begins to form a picture of how you use credit and how that might present a risk for the creditor. Higher numbers here will hurt your score, and if the percentage of credit limit used is also high, your score will be much more negatively affected.
Age and Type of Credit Matters
Age and type of credit relates to the mix of accounts on your credit report. A variety of credit helps your score, like someone with an auto loan, credit card, student loans, and other loan products. Just one type of credit, like someone who only has credit cards, and many of them, can drag your vantage score down.
Available Credit is a Minor Factor in the Vantage Model
Available Credit is the amount of credit to which you have access. This is an area where having too much credit can hurt. It’s recommended that you only open enough credit lines to deliver the amount of credit you need on a regular basis. If you routinely use $2,000 of credit a month, you probably don’t need a $100,000 credit line. Having all that money available to you will draw your score down. Since available credit is a small factor in determining your score, many people choose to get higher credit lines and keep the percentage of credit used low, since that is a major factor in determining credit score in the Vantage Score Model.
The Significance of Vantage Scores
More and more creditors are now using Vantage Scores in addition to, or in place of, FICO scores. The next time you have your credit pulled ask to see a copy of the report. By law, if you are denied credit the creditor will have to furnish you with that report; and if you are approved, most companies will let you view it as well.
That credit report will likely show whether they have used the FICO model or Vantage model, and understanding this is important, because it can guide you in the steps to improve that score.
Improving Your Credit Score Quickly
If a creditor turns you down for a car loan, and discloses he uses the Vantage Model, the best thing you can do to bring your score up is to work on the factors that carry the most weight. In this case, recent credit history, payment history, and credit limit used. You would make sure you do not apply for more credit, bring anything that is late back to paid or current status, and make sure the percentage credit used is down at a manageable level – outstanding balance at 50% of credit limit or lower.
If the credit company were using FICO models, you’d act differently to improve your credit score. You would first concentrate on payment history, and then on the overall amount you owe.