Whether you want to apply for a credit card, mortgage or business loan, you know how important it is to have a good credit score in order to help you reach your goals. However, did you know that there are actually two major credit scoring systems used to evaluate your creditworthiness?
Although both FICO and VantageScore models have the same purpose of helping lenders evaluate whether or not consumers are likely to repay their debts, there are some important differences between the two that you should understand. Continue on to learn how these two models differ, and learn answers to some of the most commonly asked FICO and VantageScore questions.
What is a FICO score?
Developed by the Fair Isaac Corporation in 1989, FICO scores are used by top lenders to make decisions about whether or not a consumer should be able to obtain credit. The score is based on data from the three major credit bureaus– Equifax, Experian, and TransUnion– which track people's credit information to generate a three-digit score ranging from 300 to 850 based on a person’s payment activities; the higher the score, the better.
When FICO scores are calculated, the following factors are considered:
- Payment history (counts as 35% of the score)
- Credit utilization (30%)
- Credit history length (15%)
- New credit obtained (10%)
- Mix of credit accounts (10%)
Since its inception, the Fair Isaac Corporation has updated FICO score models based on developments in the consumer lending field. The most popular version of the score that lenders use is the 2004 FICO 8 formula, however, the newer, 2014 FICO 9 formula is becoming more widely adopted. This model reduces the impact of medical debt on your score and will add in rental payments to credit reports when landlords choose to report this information, which could help people without much of a credit history to build a credit file.
What is a VantageScore?
The VantageScore credit scoring model was developed in 2006 by the TransUnion, Equifax, and Experian credit bureaus in order to offer an alternative to FICO scores. Although it is not as widespread as the FICO scoring system, VantageScore has gained popularity in recent year as it is thought to provide a wider picture of a person’s credit history rather than just a snapshot. This system formerly used percentages in order to evaluate people's creditworthiness, but it changed its scoring criteria to the following:
- People's payment history (extremely influential)
- The age and type of credit used (highly influential)
- Percentage of credit limit used (highly influential)
- Total balances and debt people owe (moderately influential)
- Recent credit behavior and inquiries made (less influential)
- Amount of available credit (less influential)
VantageScore is similar to FICO in that it works on a 300 to 850 scale, but, it’s more closely related to the FICO score 8 model, which doesn’t factor in paid collection accounts and reduced the impact of medical collections on credit scores, than it is to FICO 9.
Frequently asked questions about FICO and VantageScore
Credit scores can be complicated, no matter what system is doing the scoring. In order to further understand how both the VantageScore and FICO systems work, and the differences between the two, we’ve put together answers to some frequently asked questions about these models.
What is considered a good FICO score and VantageScore?
The credit score range for both FICO and VantageScore is 300 to 850; however, the way the scores classify consumers are slightly different. For example, in the FICO system, a very poor score range is 300 to 579, while VantageScore's very poor credit score range is 300 to 499. In order to be considered a very good credit risk, people must have a 740 to 799 FICO score and a 661 to 780 VantageScore. With FICO, the top tier score range is between 800 and 850 and 780 to 850 in the VantageScore system.
Why do I have different FICO scores?
As mentioned above, there are different FICO score formulas that are commonly used. Depending on which formula is used could produce varying results. Furthermore, there are FICO scores geared toward different industries, such as auto and mortgage lending, as well as credit card issuing. These measure and weigh your financial information in slightly different ways. Lastly, your scores may vary slightly depending on which credit bureau you use to pull your report. Each bureau may receive information from your creditors at different times over the course of a month, which could affect things like the amount of credit they report you’re using. Because of this, it can be a smart move to request credit scores from multiple bureaus to compare your results.
How long does a consumer's credit history need to be to establish a VantageScore and FICO score?
In order to earn a VantageScore you must have at least one credit account that has been active for a minimum of one month, and at least one credit account that has been reported to credit bureaus in the last two years. With a FICO score, you should have at least one credit account that has been active for at least six months and has been reported to the credit bureaus during that time.
How significant are late payments in the FICO and VantageScore systems?
Late payments are heavily weighted for both, but each system handles them slightly differently. In both cases the scores are calculated based on how many payments have been missed, how recently the payments were missed, and how many accounts have late payments on them. However, with FICO scores, all late payments are weighted the same, while VantageScores weigh late payments made on mortgages more heavily than those made on other credit accounts.
How does VantageScore and FICO handle credit inquiries?
Although shopping around for the best deal on a credit card or loan can be a smart choice for consumers, it can count against them on their credit score because each application they submit is considered an inquiry into their credit history. However, both VantageScore and FICO take into consideration that people may be looking for the best rates they can get, such as when they buy a car and multiple loan applications are submitted at once. In order to address this, both scoring systems do something called deduplicating, also known as deduping, which means if you have multiple inquiries on your report in a short period of time, they are weighted as one inquiry. For VantageScore, the deduplicating period lasts for a 14-day window, while FICO provides a 45-day window.
Additionally, FICO and VantageScore look at the types of inquiries made differently during the deduplicating process. For a FICO score, deduplication only applies to car, home, and student loans, while with VantageScore, it applies to all types of credit inquiries.
How are collection accounts handled by VantageScore and FICO?
Both credit scoring models consider when your accounts have been sent to collections. In the VantageScore system, accounts that were sent to collections will be ignored when you pay them off, no matter what the amount you owed was. However, VantageScore will consider unpaid collections amounts of any size. On the other hand, in the FICO system, balances of less than $100 that are sent to collections are not considered at all and FICO will ignore amounts of any size after you've paid them off.
How do the current balances on my credit card count toward my VantageScore and FICO scores?
Since the amount of available credit you use at any given time is considered an indicator of how well you manage money, both scoring systems do look at how high your balances are compared to your available credit. Both models look at the amount of credit you have used and divides it by the amount of credit you have available in order to determine your credit utilization percentage. The higher that percentage is, the more it counts against you in your credit score. However, VantageScore will also look at whether or not the high percentage is for short periods of time, or if you have a high percentage but generally pay your bill in full each month.
How can I get my credit scores from FICO and VantageScore?
You can find out what your credit scores are from both systems through nonprofit credit counselors, the three credit reporting bureaus, personal finance websites, and lenders. In some cases, you may be required to pay a fee in order to access your score, but remember, you are entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Additionally, many credit card issuers offer free credit score reports to cardholders which is a nice added perk to some of the best credit cards.
What can I do to improve my VantageScore and FICO scores?
You may not have the ideal credit score at the moment, but FICO and VantageScore will monitor your activities regularly, which gives you the chance to improve your scores. This can be done by paying all of your bills on time, keeping your credit utilization rates low, and refraining from applying for new credit unless it's absolutely necessary.
Additionally, through responsible use, secured credit cards can boost the credit score for someone just starting out on their credit journey or help you rebuild your credit score if you've made some credit missteps in the past. Secured credit cards allow you to earn the trust of lenders without posing as much of a risk since you're putting your own money on the line.
Though these two systems have their differences, the bottom line is that the better your score with either, the better chance you'll have to get a good rate on a loan, be approved for the credit card you want, etc. Both scores are important, but don't get too hung up on their differences. What's more important here is to keep an eye on how your score fluctuates, and to continue healthy financial habits in order to maintain, or work your way to, a high credit score.