What is a Credit Score: Classic FICO vs VantageScore 3.0
To help you learn more about your personal credit rating, we've broken it down for you. Simply put, your credit score is a three-digit expression of your creditworthiness. However, it is way more than that: your credit score is an important part of your financial stability. Your credit score is one of the important deciding factors utilized by financial institutions and lenders when deciding your interest rate when you get a home; car, loan or credit card.
Who are the Credit Score Players?
Over the years, the FICO score has been used most often in determining creditworthiness. VantageScore is a new player and follows a slightly different formula to achieve the same end, namely determining your risk level.
Credit scores are commonly referred to as a FICO score. Developed in 1989 by Fair Isaac Corporation, the FICO score is a mathematical formula that takes into account several factors in a person's credit history to determine their risk level. It's currently the most widely used model by banks and other lenders with an estimated 90 percent market share.
The FICO score comprises:
- Payment history - 35 percent. Paying on time, paying late or not paying at all are all factors.
- Account balances - 30 percent.
- The age of each account - 15 percent.
- Types of accounts - 10 percent. The different types are revolving, installment, mortgage and alternative financial services such as payday loans.
- Recent inquiries - 10 percent. Repeated inquiries for new lines of credit over a short period can affect your score, though rate shopping for mortgages, student loans and car loans are shielded.
How it's Calculated
Though the score was developed by Fair Isaac Corporation, they do not calculate it. That's done by each of the credit bureaus, TransUnion, Equifax and Experian, based on information in your credit report. Because each bureau collects different information, the credit scores will differ between the three. For example, the retail card you just opened might be reported to TransUnion and factored into their score, but not the other two.
The most complete picture of your creditworthiness is therefore achieved by obtaining a score from the 3 major credit bureaus: Equifax, Experian and TransUnion.
Created in 2006, the VantageScore was designed as a joint effort by the 3 credit bureaus. The breakdown of what goes into a VantageScore is slightly different than that of a FICO score. The factors and their weight are:
- Payment history - extremely influential.
- Account balances - highly influential.
- The age of each account - highly influential.
- Total outstanding debt - moderately influential.
- Recent inquires and new credit - less influential.
- Total available credit - less influential.
VantageScore 3.0, the most recent version of the formula, aims to offer a more accurate picture of an individual's credit history and thus a better prediction of their creditworthiness. VantageScore 3.0 also offers the same 300 to 850 score range as FICO. However, less than 10 percent of lenders depend on VantageScore to determine creditworthiness.
As a competing service, there are a few differences between VantageScore 3.0 and FICO.
Length of History Needed for a Score
FICO requires at least a six-month credit history and reporting from at least one account in that time period to calculate a score. VantageScore 3.0 only requires one month and reporting from at least one account in the last two years, which is helpful for consumers just starting off as well as those who've been inactive for an extended period.
VantageScore 3.0 does not penalize consumers for paid or otherwise settled collection accounts that appear on their credit report. Because they remain on your report for seven years, collection accounts are factored into a FICO score, though the impact can be reduced by paying off the debt.
For collection accounts with an outstanding balance below $100, your FICO score completely ignores it while VantageScore 3.0 greatly reduces the effect of balances below $250 on your score, but it is still a factor.
Type and Length of Account
Another big difference between FICO and VantageScore 3.0 is the way different account types affect your score. VantageScore 3.0 is advertised as a more accurate scoring system, therefore different account types are given different weight. A first mortgage, for example, has a different impact than a home equity loan. A late payment on a mortgage also has a greater impact than a late payment on a retail store account. In comparison, a FICO score has no differentiation.
VantageScore 3.0 is available for free through some free credit report websites while consumers must pay a fee to obtain their FICO score.