Credit scores are valuable indications of creditworthiness. Before granting credit or financing conditions to applicants, lenders utilize these numerical numbers to determine risk. These scores frequently influence the available loan rates and whether or not they are beneficial.
Understanding Credit Scoring Model
Credit scoring is a statistical procedure used by lenders and other companies to determine credit eligibility and loan terms. Payment history, the number and kind of accounts you have, punctuality, outstanding obligations, and other criteria may be considered.
After collecting the information, creditors enter it into an automatic system that generates a personalized score. But here’s where things get interesting: not all scoring systems are created equal, which means you may have various credit ratings. Creditors and other businesses can develop risk-based scoring algorithms.
Various Companies have Different Models
According to the Federal Trade Commission, each firm is free to apply its scoring mechanism. Furthermore, multiple scoring models can be used by businesses for different forms of credit or loans. Finally, companies may utilize a generic credit score model produced by a scoring firm. In other words, companies can design their scoring model or use one developed by a third party, such as FICO or Vantage Score.
Even while credit scoring formulas differ from one firm to another, they must all comply with the same criteria. According to the Federal Trade Commission, all credit scoring algorithms must follow the Equal Credit Opportunity Act requirements.
What is FICO and Vantage Score?
As you may or may not be aware, most creditors and lenders utilize a FICO score to evaluate your creditworthiness. VantageScore is a comparable sort of credit score developed in an attempt to compete with the FICO score and may enhance the credit scoring system when necessary. The FICO score has a lengthy history in the financial sector, having been utilized for many years by nearly every financial institution, lender, and creditor. Vantage Score is a relatively new credit rating system developed by the three credit bureaus to break into the market and offer a better product.
The FICO score has been around for a long time and was created by Bill Fair and a mathematician named Earl Isaac. They reasoned that gathered data, when used wisely, might lead to improved business decisions.
Vantage Score is a relatively recent credit rating system developed and implemented by the three leading credit agencies. It was first introduced in 2006 and is said to be even better at forecasting than FICO. You’d think that banks and other financial organizations would rush on this opportunity, but it’s still a tough sell. When you pull your credit through one of the three leading credit agencies, you will now be shown their VantageScore rather than your FICO score, which may be highly deceptive. They created this product to enhance the scoring system and better forecast the risks and rewards of lending money to prospective borrowers, and it might be much better. The problem is that the FICO scoring system has been in use for so long that many find it challenging to convince corporate executives to use a new system when the one in use has been extremely good.
Categories and Factors Affecting FICO Score
FICO ratings vary between 300 and 850. The better the score, the more creditworthy the applicant is and the lower the risk. The average FICO score is 687, with a median score of 723. Here’s the breakdown:
723 is the median.
687: Average Score
620-659: Not Good
500-579: Extremely Poor
FICO scores are generated using information from customer credit files held at each credit reporting agency. To diagnose one’s credit score, one should examine the factors that most influence one’s FICO score computation. The following elements are used to determine the score:
35%: payment history
30%: outstanding amounts
15%: credit history length
10%: new credit
10%: Credit types used
Categories and Factors Affecting Vantage Score
The Vantage Score model is an alternative to the FICO scoring model. Equifax, Experian, and TransUnion created this algorithm in 2006. Some argue that it is a more flexible scoring methodology since it considers more criteria and makes individuals with lower FICO scores appear more favorable. Because it is still new, it has not yet acquired widespread acceptability among creditors and lenders.
The Vantage Score is calculated differently than the FICO score. It also has a separate score range and evaluation systems. It begins at 501 and progresses to 990. The national average Vantage Score is 736. It is typically divided into the following categories or grades:
A: 901-990: Super Prime, top 11% of the population
B: 801-900: Prime Plus, top 40% of population
C: 701-800: Prime, top 60% of population
D: 601-700: Non-Prime, 38% of the lowest population
F: 501-600: High Risk, with the lowest 19% of the population.
FICO ratings will appear to be greater than Vantage scores. It is because they employ a different scoring system and range. The greater the VantageScore, as with FICO, the better the score. VantageScore uses these components to compute its score.
32 %: payment history
23%: Credit utilization
15%: credit balances
13%: credit depth
10%: Credit recently obtained
7%: available credit
Top 5 Key Differences of FICO and Vantage Score
- Requirements for obtaining a credit score
Millions of individuals in the United States do not have a credit score. While FICO requires at least six months of history and one account reported within the last six months, Vantage Score just requires one month of history and one account reported within the previous two years.
- The consequences of late payments
FICO handles all late payments the same, regardless of account type. On the other hand, Vantage Score penalizes late mortgage payments more than other forms of credit.
- How credit inquiries are handled when comparing rates
FICO and Vantage Score have distinct criteria for how repeated credit inquiries within a certain period are addressed.
- The credit bureaux’ involvement in scoring models
In the United States, three national credit bureaus hold most people’s credit histories: Equifax, Experian, and TransUnion. Each of these organizations employs the FICO Score algorithm to generate a variation of the FICO Score based on the information gathered about each client. That is, each credit bureau uses a slightly modified version of the FICO scoring methodology.
VantageScore, on the other hand, uses the same algorithm for all three leading credit reporting agencies. Even though they use the same model for each credit bureau, the score from each bureau may change depending on what information is submitted to each credit bureau about a person.
- The influence of collections
VantageScore disregards all paid collection accounts when considering collection agency entries on a credit report. According to the FICO score model, the impact of paying collections varies depending on whether the remainder of your credit history is mainly excellent or negative. The more recent the group, the more likely it is to lower your FICO score.