When it comes to good personal finance habits, knowing your credit score is key before making any large purchases to avoid high interest rates. There are two main players that lenders use to distribute scores and that’s VantageScore and FICO. Here’s a little background on both.
The VantageScore credit scoring model is a collaboration between all three credit reporting agencies (CRA) Experian, Equifax and TransUnion. It’s their attempt at presenting an alternative against the Fair Isaac Corporation’s (FICO) method of determining creditworthiness.
FICO’s dominance had run for years (since 1956) and led to FICO’s predictive analytics, introduced in 1989, being the standard lenders used to assess risks associated with specific borrowers. Currently, FICO is still the most widely used method creditors use to assess risk. However, VantageScore is gaining their share of the market.
This is especially true thanks to free online credit scoring services like CreditSesame and Quizzle which use the VantageScore 3.0 version to let consumers monitor their progress.
FICO has its credit scoring models based on credit reports of millions of unspecified consumers obtained independently from each of the CRAs. A separate model is then built for each CRA and this is based on data from the agency. Credit scores for FICO vary from 300 to 850. The lower scores indicate higher risk. A 650 credit score from FICO is fair. Individuals with this credit score are considered subprime borrowers and may be offered higher interest rates or less terms for loans and credit cards.
VantageScore builds its model of credit scoring by combining consumer credit files received from the three CRAs. They then came up with a formula for use by all the CRAs. The older VantageScore range is from 501 to 990. However, the upgraded VantageScore 3.0 has a similar range to FICO at 300 to 850.
Understanding Your Credit Score
Credit scores require at least a certain amount of experience in credit to base predictions. You must maintain credit for 6 months to obtain a FICO score; only one or two months for VantageScore. Hence VantageScore maybe more beneficial to those just starting to establish credit.
As far as what goes into determining your score, both VantageScore and FICO take into consideration these aspects:
- payment history
- age of credit
- credit utilization and mix
- credit inquiries and,
- new credit when formulating your score
Each segment is weighted fairly similar for both scores, however, FICO score identifies importance via percentages while VantageScore does not. Also, VantageScore is more harsh when it comes to late mortgage payments than FICO who treats all late payments the same.
New Versions and Medical Debt
Both methods have updated versions in the FICO Score 9 and VantageScore 4.0 which don’t take into account paid medical debt and is a tad more lenient on unpaid medical expenses.
All three CRA’s will offer a 180 day (6 month) waiting period before any medical debt is included in your report – the source where both versions calculate your score. This gives time for disputes and health insurance companies to pay those expenses. Also for both models, unpaid medical debt will not hurt your score as much as previous versions while paid debt is completely disregarded.
Counting of inquiries
Hard credit inquiries negatively affect both FICO and VantageScore, however not as harsh as other scoring factors like delinquencies. For instance, when it comes to rate shopping for a mortgage or auto loan, you’ll have a period where many banks will request your credit report (hard inquiries) to determine what interest rate to implement.
Both credit scoring companies understand that this happens when searching for a home or vehicle and isn’t necessarily an indicator of risky financial behavior. This is why they employ a process called “deduplication” which means they combine inquiries into one if they all occur within a certain amount of time.
VantageScore uses 14 days while FICO uses a 45-day span. Also, VantageScore uses this distinct treatment in all types credit whereas FICO only applies it to student loans, mortgage, and auto loans.
Effect of Low Balance Collection
If you have small debt that’s been transferred over to a collection agency, there’s good news. FICO entirely ignores all collections below $100 and treats all collection accounts above that amount similarly. VantageScore will not use any debt that has been paid off to determine an individuals credit score.
So even though there are slight differences between FICO and VantageScore models, it’s still important to practice good financial habits by making timely payments, keeping balances small and only applying for new credit when essential. However, when every point counts, knowledge of some of the differences of credit scoring can save money when purchasing a home or car.
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