- 1 Credit Scoring Differences: FICO vs Vantage Score
- 2 Understanding Credit Scores: FICO vs. VantageScore
- 3 What is a Credit Score: Classic FICO vs VantageScore 3.0
- 4 The FICO score is losing ground to a different credit score
Credit Scoring Differences: FICO vs Vantage Score
by Silicon Valley Blogger on 2009-07-28 18
Credit scores can be pretty confusing. It’s because when you go hunting around for them, you’re bombarded with many options. What you think is a free credit score really isn’t (you only get a free trial) and the one you’ve picked up may not be what your lender is using to gauge your creditworthiness. To make heads or tails of all this, let’s see if I can put some facts down. Let’s start with this basic question: what are the differences among the various credit scores that are offered by different agencies?
The most widely used credit score is the FICO score, which was developed by the Fair Isaac Corporation (hence the name FICO). And contrary to what you may have heard or read, it is not called a “FICA score” (there’s no such thing as a FICA score, even though tons of people are looking around for theirs ).
Credit Scoring Differences: FICO vs VantageScore
While the FICO credit score is popular among lenders, the credit bureaus also use their own models. For instance, here’s a look at the different scores available out there, and where to pick them up (some products mentioned below bundle credit scores with reports):
(letter grade: A – F)
*Products marked “sale” have a promo code automatically applied so you’ll receive the discounted price as listed above.
Be aware of the differences: apparently, your scores can vary by as much as 50 points, depending on which credit bureau you get them from. For example, your Experian credit score (a proprietary number) won’t necessarily match the number you obtain through a credit monitoring service such as the myFICO Score Watch service. Here are some scenarios that can cause variations in your credit score and report:
- Certain financial events may be reported to just one bureau but not another. For instance, there was a time when a department store credit card I owned would only report to a particular credit agency. Another time, I noticed a closed account appearing on one of my credit reports, but not on others.
- Errors may show up in one of your credit reports. You may want to double check your credit information across reports for potential errors.
- Identity theft is also a risk, and can appear in any of your credit reports. It’s therefore important to examine your reports on a regular basis. Here’s more on how to prevent identity theft and get identity theft protection.
- Different reports and different scoring models by each credit agency can lead to varied scores.
Be Careful About Where You Get Your Credit Score!
It’s important to differentiate between your credit score and your credit report. Your credit report (or credit history) is a record of your past financial behavior — mostly showing how you’ve dealt with loans and debt. If you’ve been bankrupt or had a foreclosure in your past, these will be captured in your credit history. It’s easy to get a report: you can fetch it from all three major credit bureaus for free via AnnualCreditReport.com.
Now there are companies (the credit bureaus, agencies and independent companies) that distill all this credit information into one convenient number via a formula, resulting in your credit score. But with credit scores, things are not as straightforward as they are with your credit reports, since you can fetch different versions of these numbers from a variety of places, as we’ve illustrated earlier. The most well known and widely used is the FICO score, but other alternatives also exist, called non-FICO (or even “FAKO”) scores.
Why are there so many variations? There’s a licensing cost to use FICO, which has prompted some financial companies that need to buy and use scores, to opt for the more cost effective solution of developing or resorting to proprietary scoring models. After all, many financial companies are high volume users of such scores, since they evaluate risk levels for tons of accounts. This chance to grab a piece of the credit score market has encouraged reporting agencies to develop and offer their own scoring system to the public.
Don’t confuse one score for another. If you’re not careful, you may end up applying for a loan based on the “wrong” credit score (one that your lending is not using). I’ve read about people who ended up with more expensive loans than they bargained for, because they were relying on numbers that were different from those used by their lenders. So before paying to see your score, make sure you know what it is you’re picking up. First ask your lender or bank what they’re using: is it a FICO or a Vantage score that they’re basing their evaluations on? Better yet, some banks may be willing to share your credit information with you for free, so it doesn’t hurt to ask!
Copyright © 2009 The Digerati Life. All Rights Reserved.
Understanding Credit Scores: FICO vs. VantageScore
Checking your credit score is one of the first things borrowers are urged to do when shopping for a mortgage. But these days, you need to know which type of credit score you're getting.
A new credit scoring system, called VantageScore, is being promoted by the three major credit reporting bureaus. It was developed by them as an alternative to the dominant FICO credit scoring system that lenders have traditionally relied on.
For consumers, the biggest difference between the two is how they report your credit score. The FICO system reports scores on a range from 301-850, with higher scores signaling better credit. The VantageScore system operates in a similar manner, but uses a range from 501-990. So while a score of 770 represents excellent credit under FICO, it's a fairly middling score under the VantageScore system.
So why did the three credit reporting companies, Experian, Equifax and Transunion, develop the new system in the first place? They say one reason is for consistency - FICO scores frequently vary when reported by the three different bureaus. They also say the new system is easier to understand; every hundred point range in the VantageScore system corresponds to a letter grade - A, B, C, D or F - that gives the consumer an instinctive feel for where their credit stands.
However, skeptics note that the main reason FICO scores vary among the three credit bureaus is because lenders don't always report the same information on a borrower to all three - some lenders and creditors may only report borrower performance to one of them, for example. The new system doesn't fix that.
A bigger reason is likely because the three credit agencies have to pay FICO's parent company, the Fair Isaac Co., licensing fees for using the FICO system. Since they developed the VantageScore system, they don't have to pay another company for using it - provided they can get lenders to embrace it instead of FICO as the primary system for evaluating consumer credit worthiness.
That doesn't seem likely to happen, at least in the immediate future. Fannie Mae, Freddie Mac and the FHA all use rely on FICO scores for evaluating credit, and as they go, so goes the mortgage industry. At the same time, you may still encounter the VantageScore system from time to time, so it helps to understand how it works.
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.
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.
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.
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.
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The FICO score is losing ground to a different credit score
The FICO score has been the dominant marker of creditworthiness ever since it came on the scene a quarter century ago. Today, some 10 billion FICO scores are sold each year to lenders looking to vet potential customers for new credit, according to parent company Fair Isaac Corporation (FICO).
But the FICO score is slowly losing ground to its closest competitor — the VantageScore . The VantageScore, launched in 2007, was the result of a joint effort by the three major credit bureaus (Experian, TransUnion and Equifax) to create an alternative to the traditional FICO score. FICO dragged the VantageScore maker to court in an effort to stop it from using its signature 300-850 credit score range, but the company lost the suit in 2010. VantageScore has been gaining ground ever since.
Over the last year, six billion VantageScores were used in the U.S., according to an independent study commissioned by parent company VantageScore Solutions, LLC. That’s double the number of VantageScores used a year prior and a six-fold increase since 2012.
“We are seeing tremendous growth in many consumer lending categories, and bypassing the six billion scores used marks a major milestone for the VantageScore model,” said Barrett Burns, president and CEO of VantageScore Solutions.
The VantageScore is used by 2,000 lenders, including seven of the top 10 largest financial institutions in the U.S., according to company spokesman Jeff Richardson. FICO says its score is used by 90 of the top 100 largest financial institutions. Despite this growth, VantageScore is still the new kid on the block. And Richardson could not say based on the study how many of those six billion scores were used by lenders in deciding to issue new credit and how many were delivered to consumers through credit issuers or through free credit-monitoring services like CreditKarma, Credit Sesame and Quizzle.
FICO, on the other hand, bases its 10-billion-score figure solely on scores used by lenders to make decisions about issuing new credit, says FICO spokeswoman Christina Goethe. For that reason, comparing the two scores is “not apples to apples,” she says. FICO scores are still used in over 90% of lending decisions.
VantageScore may be gaining ground on FICO, but FICO certainly isn’t going anywhere.
FICO’s core business is the sale of its credit scoring models to the major credit bureaus, which in turn use their own customer data to create a FICO score and sell that score to lenders. So long as lenders are willing to pay for FICO scores, don’t expect credit bureaus to stop selling them. FICO generated $207 million in revenue from the sale of FICO scores in 2015, up from $186 million in 2014.
“This battle in my mind is not unlike the Microsoft vs. Apple battle, where you have one dominant player but the second player is chipping away at its market share,” says credit expert John Ulzheimer. “To be No. 2 in the world of credit scoring is not bad.”
What’s likely to become common is that lenders will use a dual score strategy, vetting customers based on both a VantageScore and a FICO score, Ulzheimer says: “Lenders will say, based on the intersection of a person’s scores, we believe their risk to be this and we’re going to offer them that.”
The real battle is which of the dueling scoring models will find the best way to offer scores to Americans who do not have a credit score — the 26 million people who are considered “credit invisible” by financial regulators today. Some people simply don’t have enough credit history to create a credit file and others may have too many past delinquencies on their report.
VantageScore 3 , released in 2013, ignores any collections accounts with zero balances and reduces the penalty for people with past due medical debts. FICO answered this challenge by releasing FICO 9 last fall, a new score that also ignores $0 balance debt collections and reduces the impact of past-due medical debts on its score. Still, more people are "scoreable" under the VantageScore model, says Ulzheimer.
FICO got a major leg up on VantageScore in October when it announced a new pilot program for the FICO XD score. The score is based on alternative scoring data like cellphone and utility payment history (which are not factored in the regular FICO score). So far, 12 major credit lenders are testing the score.
Much of the advice around what makes for a healthy credit score is based on FICO’s scoring model. As the VantageScore becomes more widely used, it’s helpful to understand what factors can influence both scores. You can find a detailed breakdown of how credit behaviors impact the VantageScore here and the FICO score here , but you won’t find many differences.
Both scores put a lot of weight on payment history and credit utilization (how close you are to maxing out your available credit limit). Making on-time payments is undoubtedly the best way to improve either score, right behind using less than 30% of your total available credit (ex: if you’ve got 3 credit cards with a combined limit of $10,000, you want to make sure you’re not carrying more than $3,000 on them at a time).
Although each company’s scoring model is different, if you were to put your FICO score and your VantageScore side by side, they will likely vary but not by much. “If you have a good credit score or a bad credit score, you will have a good score or a bad score regardless of the brand,” Ulzheimer says.