Credit Scoring Models: What You Need to Know

Credit Scoring Models: What You Need to Know

A credit score is essentially a number that represents how likely you are to repay a loan based on your credit history. While it may sound simple, the fact that there are several different credit scoring models can make the process of navigating personal credit quite challenging. Here, we’ll discuss the different credit scoring models, what they mean, and how they are used by creditors and consumers.

FICO Score Model

Your FICO score is probably the most prevalent score and the one that you will hear discussed most often. Created and managed by the Fair Isaac Company, FICO scores are available in over 50 versions, all of which depend on the type of credit you are trying to obtain. In other words, the FICO score you use when you are trying to secure a mortgage may be completely different from the one you use when applying for a credit card.

So why is the FICO score the most popular scoring model? The FICO score is regarded as the most reliable because it has been around for approximately 30 years and continuously changes with the financial landscape. FICO updates are undertaken to ensure that consumers’ credit scores are as accurate as possible. Introduced in 2014, FICO 9 is the most recent scoring model, and it differs from the prior FICO scoring model because unpaid medical bills do not impact the credit score as severely. The standard, or classic, FICO score ranges from 300 to 850. A score above 740 is considered to be excellent and one under 600 is considered poor, while anything in between is generally regarded as average to above average.

In addition to the standard FICO score, several subcategories comprise the total score, and each one is significant in its own way. Each of the factors is outlined below:

Payment History—Payment history accounts for 35 percent of the FICO score. A record of on-time payments, no accounts in collections, and no bankruptcies or foreclosures will all improve your FICO score. Late payments have a negative impact and the later the payment, the more it will lower your score.

Credit Utilization—Credit utilization is weighted as 30 percent of the FICO score. If you have a credit card, then how much you charge on it is compared to your total credit line to come up with a utilization percentage. For example, if you have a credit card limit of $1,000 and a balance of $700, your credit utilization is high, which will negatively impact your credit score. To keep your utilization at 30 percent or lower on a card with a $1,000 limit, you should keep your balance at less than $300 a month.

Credit Age—Also known as credit history, this accounts for 15% of your FICO score. The longer you have had a credit card, for example, the more your score will improve. This, of course, is provided that you have maintained a good payment history.

Credit Mix—Amounting to 10 percent of your FICO score, credit mix refers to how many types of credit you have. They could include loans, mortgages, and credit cards. 

New Credit—New credit accounts for 10 percent of your score. However, applying for too much new credit too fast could potentially hurt your FICO score. If you are trying to buy a new house, it is better to just focus on that instead of attempting to purchase a vehicle or apply for credit cards at the same time.

VantageScore Model

Introduced in 2006, the VantageScore model was designed to compete with the FICO scoring model and was spearheaded by the three major credit bureaus: Equifax, Experian, and TransUnion. The VantageScore is calculated using data that includes maintaining a low card balance, making payments on time, and keeping inquiries low. The range for the VantageScore model is the same as the FICO range—300 to 800—but it is more of a ballpark figure for consumers to access. Unfortunately, the VantageScore is not considered an alternative to FICO scoring. Lenders do not consider a consumer’s VantageScore when making credit decisions.

Monitor Your Credit

While there is plenty of general information available on both scoring models, there is still some level of secrecy when it comes to all of the nuances that comprise a credit score. Many lenders not only rely on FICO scores, but they are also permitted by law to use a combination of FICO scoring and their own internal credit criteria to make decisions.

If you are attempting to improve your credit score, then monitoring is one of the first steps to take. You can access your credit report from all three credit bureaus to obtain a good idea of what is on your report and what you need to work on. Each credit bureau provides consumers with one report per year free of charge, although if you want to access your FICO score, you will need to pay a small fee. Accessing your VantageScore is a bit easier, and there are several mobile apps and websites that will allow you to regularly view your VantageScore without harming your credit score.

Taking charge of your finances and credit starts by becoming educated on how your score is calculated. As you do more research you will learn what you need to do to raise your credit score and improve your finances over time. The key is to get started.