- Fannie Mae and Freddie Mac require lenders to use FICO scores.
- Why the credit score you see may not be the same score lenders see.
- Steps you can take to improve your credit score.
How VantageScore & FICO Compare
Your Credit Score: It’s Everything & Nothing
Life is easier with a high credit score. People with high credit scores qualify for the lowest interest rates on car loans, receive instant approval on credit cards, find it easier to rent an apartment, and get quick pre-approval for home loans. A low credit score can make it harder for you to find a low-interest car loan, get approved for credit cards, and qualify for apartment rentals and home loans. Some employers may review your credit report and score when deciding whether to hire you.
|Credit Score Categories|
Average US FICO credit score in 2012 was 690
However, your credit score is not the only thing potential lenders use to decide whether to approve your loan or set your interest rate. Lenders also look at the number of years you have had steady income, how much existing debt you may have, and other factors, such as the amount of money you have in your bank accounts and if you experienced a recent bankruptcy or mortgage foreclosure. Your credit score, plus these other factors, are pieces of a jigsaw puzzle that creates a picture of your creditworthiness.
What’s a Credit Score? Why You Have More Than 50 Scores
A credit score is like a weather prediction for rain. Weather forecasters say things like, "There’s a 10% chance of rain tomorrow." That means based on all of the raw weather data available, a forecaster predicts an certain area will have a 1 in 10 chance of rain. A credit score is like a weather prediction but instead of using a zero to 100 scale like weather forecasters use for predicting rain, credit score creators use a 300 to 850 scale. An 850 score is a prediction there’s a near-zero chance the consumer will fail to repay a loan. Think of an 850 as a "sunny skies and clear" prediction. A 300 score is a prediction the consumer is a very high credit risk. A 300 score is like a "100% chance of rain" prediction. We all know weather forecasts are imperfect predictions, and credit scores are imperfect predictors, too. That is why lenders look at more than your credit score when making a go/no-go decision to approve your loan.
The credit score software most lenders use are specialized versions of Fair Isaac & Co.’s FICO. FICO was released in 1989, and FICO has been updated periodically since. The specialized versions are based on industry: auto lending, mortgage, or credit card. Consumers can see their FICO score by buying a $15 per month service from FICO’s myfico.com Web site. Because the consumer score is not a specialized score, the score you buy may differ from the score an auto finance company, mortgage lender, or credit card issuer may see when you apply for one of those loans.
|Basic Scoring Models Offered||Varieties of FICO Offered by Credit Reporting Agencies1||Credit Reporting Agency Proprietary Scoring Models|
|• General / Generic • Automotive • Bankcard • Mortgage • Personal finance • Installment loan • Custom||• General / Generic • Automotive • Bankcard • Mortgage||Experian2:||• Equifax • Experian • TransUnion|
|FICO Risk Model, FICO Advanced Risk Score|
|FICO Risk Score Classic, TransUnion NextGen|
|1. Fannie Mae and Freddie Mac require FICO scores averaged over two or three CRAs. 2. Experian offers 16 variations of FICO to creditors. 3. TransUnion offers 16 variations of FICO, too. 4. Equifax offers 15 variations of FICO, plus two called Pinnacle.|
Sources: Fair Isaac, VantageScore, Equifax, Experian
The upstart credit scoring model is Vantage-Score. Vantage-Score got its start in 2005 and is owned by the biggest consumer credit reporting agencies (CRAs) — Equifax, Experian, and TransUnion. The latest version of Vantage-Score was released in the spring of 2013. Vantage-Score 3.0 uses the same scale as FICO, and claims to be more useful than FICO for consumers with limited credit history, such as young people. Like Fair Isaac, Vantage-Score offers three scoring models by industry, plus a score it sells to consumers.
We do not know if Vantage-Score or FICO offer more accurate predictions. We do know Fannie Mae and Freddie Mac require lenders to include borrowers’ FICO scores in their loan applications, which means virtually all US mortgage lenders use FICO. Vantage-Score claims a growing number of lenders use Vantage-Score, but neither Fair Isaac nor Vantage-Score release their customer lists, so it is not possible to know how rapidly Vantage-Score may be growing.
Consult with the Bills.com Debt Coach to learn your options for resolving debt, and the costs and time to debt freedom for each.
FICO and Vantage-Score are not the only credit scores in town, which can be confusing. Equifax, Experian, and TransUnion each offer their own credit scores, which do not appear to be based on Vantage-Score. Therefore, it is possible for a consumer to have more than 50 credit scores simultaneously (see the table above).
Because you have more than 50 credit scores, it is possible for you to look at your FICO score online, and a few hours later apply for a loan and be told by a creditor that uses a different FICO version your score is higher or lower than what you expected. This is normal, and should not be alarming unless the scores differ by a large amount.
What’s Behind Your Credit Score
Both Fair Isaac and Vantage-Score share general information about how they calculate FICO and Vantage-Score credit scores. The tables below show the similarities and differences. Notice that your payment history is an extremely important part of both. On-time payments are rewarded, and delinquencies are penalized. The lesson here is clear: Fair Isaac and Vantage-Score think your payment history is an accurate predictor of your future payment behavior.
|Weight of VantageScore 3.0’s 6 Factors|
|Payment History||Repayment behavior (current, late or charged-off)||Extremely Influential||30%|
|Age And Type Of Credit||Length of credit history and types of credit||Highly Influential||28%|
|% of Credit Limit Used||Proportion of credit amount used/owed on accounts||Highly Influential||23%|
|Total Balances/Debt||Total amount of recently reported balances (current and delinquent)||Moderately Influential||9%|
|Recent Credit Behavior||Number of recently opened credit accounts and credit inquiries||Less Influential||9%|
|Available Credit||Amount of credit available||Least Influential||1%|
|* VantageScore 3.0 according to VantageScore ** VantageScore 3.0 according to Experian|
Six Factors in VantageScore 3.0. Source: VantageScore and Experian
Vantage-Score 3.0, unlike FICO and earlier versions of Vantage-Score, ignores aged paid-off accounts that were delinquent. The theory is these consumers learned a lesson from their late payments, and shouldn’t suffer a lingering penalty if the account is paid. Vantage-Score 3.0 also ignores late payments from consumers who live in areas struck by natural disasters. The new model scores consumers who have a six-month credit history, which is too short for Fair Isaac to generate a FICO score.
|How Fair Isaac Weights 5 Factors in FICO|
|Item||Weight||Positive Factor||Negative Factor|
|Payment history||35%||Paying accounts on time consistently||Late or missed payments|
|Total debt and total available credit||30%||Low relative credit utilization||High relative credit utilization|
|Length of positive credit history||15%||Oldest positive account||No or short credit history|
|Mix of types of credit||10%||Variety of tradelines||Too many of one tradeline|
|New credit applications||10%||No recent applications||Too many applications in a short period of time|
Key factors in FICO credit score calculation
Which Credit Score Should I Worry About?
As mentioned, you have many credit scores. The most important scores are your FICO scores because FICO is the go-to company for most lenders. FICO charges a fee when a lender or consumer asks for a FICO score. Therefore, beware offers for free credit scores. The offers are either not FICO scores or are offers meant to entice you into signing up for ongoing monthly services, such as credit report monitoring. These services typically cost $15 per month.
Is it worth $15 per month to monitor your credit file and see estimates of your credit score? Yes and no, depending on your situation. Generally, consumers with damaged credit history who are rebuilding their credit with the goal of qualifying for a large loan, such as a mortgage, should consider credit report monitoring to track their progress. However, if you have no plans for a mortgage, refinance or car loan, then credit report monitoring is not worth the expense.
What Can I Do If My Credit Score Is Low?
As you can see in the tables above, a low credit score is the result of negative information appearing in your credit report. (By contrast, no credit score is the result of little or no credit history.) Your low credit score may be the result of errors in your credit history, or bad payment habits. Start by reviewing your credit history.
You can get a no-cost, no-gimmick copy of your credit report from each CRA once each year. If you start with the assumption that the CRAs publish the same information about your history, you can monitor your credit reports for no cost. Go to Annual-Credit-Report.com and request a report from one CRA. Four months from now, order another. Then, four months after that, order one from the third CRA.
Keep a sharp eye for any unexpected negative information or accounts (called derogatories) appearing on your reports. Your reports should include accurate account names, balances, credit limits, and payment history. Everything you see on your credit report helps potential lenders decide whether to extend credit to you and what interest rate to charge if they do put your application in the "yes" pile. Therefore, if you find inaccurate information in one of your credit reports, it pays to correct the error. Dispute any inaccuracies you see in your credit report. Click on the link just mentioned to learn the four steps consumers can take to dispute incorrect information appearing on their credit report.
The three major credit reporting agencies also offer consumers the ability to dispute a credit listing online:
|File a credit dispute online at Equifax||File a credit dispute online at Experian||File a credit dispute online at TransUnion|
Credit reporting agency contact information
Recovering From Bad Credit
The easiest way to help yourself rise out of a low credit score is to pay your loans and credit card bills consistently and on time. Establish a mixture of accounts (called tradelines in the credit world). Lower your credit utilization. That means, do the opposite of maxing-out your accounts.
|Five Steps to an Improved Credit Score|
|Pay your debts on time|
|Keep revolving lines below 30% use|
|Diversify your mix of accounts|
|Keep your oldest account active|
|Dispute inaccurate credit report info|
Steps to boost your credit score
If you have no credit, then open a secured credit card. A secured credit card requires you to make an initial deposit into an account the card issuer uses as security. For example, you deposit $250 into an account and the issuer approves you for a card with a $250 credit limit. The deposit is not used to make the monthly payments. Pay on time. Your payments will appear on your credit report and start building a positive history.
The ideal is to have three or more open, active accounts appear on your report. Add a variety of accounts as your credit improves. The more you improve your score the more offers to open new accounts will come to you.
Bills Action Plan
Understanding the ways your credit scores are computed helps you make good decisions on how to manage your debt. Here are four quick tips:
- Get a copy of your credit reports from Annual-Credit-Report.com
- Dispute inaccurate information.
- Lower your credit utilization — don’t max-out your credit cards
- Diversify your mixture of credit account types
- Keep your oldest accounts active