Credit Score Varieties
It may appear not easy to believe, yet you have dozens of credit ratings. They are, however, not all made equal.
FICO, short for Fair Isaac Corp., is the largest and most widely used provider of credit scores. Based on the information in your credit reports, FICO generates credit scores for the three credit bureaus. Because each agency collects and reports your information on its own, your FICO score will normally fluctuate between them.
“Even under the FICO moniker, there are multiple different models used for different purposes, such as comparing mortgage applications to credit card applications,” says John Ganotis, founder of the website Credit Card Insider. This implies you have different FICO scores with each of the three credit bureaus. According to Credit.com, it is estimated that there are more than 50 FICO scores alone.
Although FICO is the most well-known credit scoring model, it is far from the only one. “A little more than a decade ago, the three credit bureaus formed a joint venture and developed VantageScore, a competing model for FICO scores,” explains Lyn Alden, founder of Lyn Alden Investment Strategy a website that delivers market data to individual investors and financial professionals. She points out that VantageScore is now regarded as a “genuine” credit score utilized by lenders but with a smaller market share than FICO.
How Credit Scores Are Determined
Because each agency’s methodology is proprietary, the specifics of how credit scores are created remain mostly unknown. However, we do know that the FICO model is based on the following five major credit score factors:
- Payment history (35% of the total): Paying your payments on time is not just vital for avoiding late fees; it is also the most important aspect of your FICO score. Payment history accounts for more than a third of that total. Therefore, even one or two late payments can have a significant influence on your credit score.
- Amounts owing (30% of total): Another crucial component is the overall amount of debt you owe in contrast to your total accessible credit, which accounts for one-third of your FICO score. This is commonly referred to as your credit utilization ratio, and experts advise keeping it below 30%.
- Credit history length (15%): Lenders want to know you’ve been in the credit game for a while. The more credit history you have, the better.
- Credit allocation (10%): Your credit score is boosted by diversifying your accounts. This demonstrates your ability to manage various bills, such as credit cards, student loans, or a mortgage. Of course, your accounts must be in good standing, or they will have a negative impact on your FICO score.
- New credit (10% of total): Too many hard inquiries and new accounts in a short time may raise the possibility of struggling to pay your expenses. So, if you’re turned down for a credit card, don’t try again; instead, wait a few months and work on improving your credit. And, if you’re looking for a mortgage, vehicle loan, or student loan, do it within 45 days so that all of your inquiries are processed as one. Fortunately, this element only accounts for 10% of your FICO score, so creating a new account now and then will have no effect.
Credit Score Levels
According to Alden, the initial two versions of VantageScore had ranges that differed from the FICO score (501 to 990). The third is now based on the same 300-to-850 score range as FICO.
“While particular percentages have not been disclosed,” Alden notes, “VantageScore has stated that it weighs its credit score similarly to FICO, with payment history and credit utilization being the most critical criteria.” These are followed by less essential criteria such as credit age, credit diversification, and new credit. “FICO and VantageScores for the same individual are usually similar in number,” she observes.
Each creditor has its idea of what constitutes good or bad credit. However, FICO considers the following ranges to be standard:
- Exceptional: 800 or above
- Excellent: 740-799
- 670-739 is acceptable.
- 580-669
- 579 and lower are considered poor.
According to FICO, the national average FICO credit score now exceeds 700, good news for many Americans.
However, keep in mind that various scoring models may employ other ranges. For example, according to a Los Angeles Times story, the Credit Optics assessment system by SageStream employs a scale of 1 to 999, with a score of 374 considered “very good.” Bank of America is one creditor that uses Credit Optics as a “supplemental score” while making lending choices.
But don’t be concerned about preserving the perfect credit score for every algorithm. For example, you’re usually in excellent condition if you have a decent FICO score because 90% of lenders use this scoring algorithm when evaluating applicants.
