Understanding Different Credit Scores
When it comes to credit scores, it’s important to know that there are different types of scores that can be used by lenders, creditors, and even landlords to evaluate your creditworthiness. The most commonly used credit scores are FICO Scores and VantageScores, but there are also industry-specific scores and custom scores created by individual lenders.
FICO Scores, which range from 300 to 850, are the most widely used credit scores and are used by many lenders to make credit decisions. These scores are based on five main factors: payment history, amounts owed, length of credit history, credit mix, and new credit.
VantageScores, on the other hand, range from 300 to 850 and were created as a joint venture by the three major credit bureaus: Equifax, Experian, and TransUnion. These scores are based on similar factors as FICO Scores, but they also take into account trended credit data, which looks at how borrowers’ credit behaviors have changed over time.
It’s important to note that while FICO Scores and VantageScores may use different algorithms to calculate scores, they both aim to provide a snapshot of an individual’s creditworthiness. Other credit scores, such as industry-specific scores, may be used to evaluate a borrower’s risk in a particular sector, such as auto loans or mortgages.
Understanding the different types of credit scores can help you better manage your credit and make informed decisions about borrowing and lending. It’s also important to monitor your credit scores regularly and check your credit reports for errors or inaccuracies that could affect your scores.
The Importance of FICO Scores
FICO Scores are widely considered the gold standard of credit scores and are used by many lenders to make credit decisions. These scores range from 300 to 850 and are calculated based on five main factors: payment history, amounts owed, length of credit history, credit mix, and new credit.
Payment history is the most important factor, accounting for 35% of your FICO Score. This factor looks at whether you have made payments on time, how often you have missed payments, and how long it has been since you missed a payment. Late payments, defaults, and bankruptcies can all negatively impact your payment history and lower your score.
Amounts owed, which accounts for 30% of your FICO Score, looks at how much you owe on your credit accounts compared to your available credit. High credit utilization ratios, or maxing out your credit cards, can lower your score.
Length of credit history accounts for 15% of your FICO Score and looks at how long you have had credit accounts open. The longer your credit history, the more positively it can impact your score.
Credit mix, which accounts for 10% of your FICO Score, looks at the types of credit accounts you have, such as credit cards, loans, and mortgages. A diverse mix of credit accounts can help boost your score.
New credit accounts for the remaining 10% of your FICO Score and looks at how often you have applied for new credit. Opening multiple new accounts in a short period of time can be seen as a red flag and lower your score.
Overall, FICO Scores are an important tool used by lenders to evaluate an individual’s creditworthiness. By understanding the factors that go into calculating your FICO Score, you can take steps to improve your score and increase your chances of being approved for credit.
How VantageScore Differs from FICO
While FICO Scores are the most commonly used credit scores, VantageScores are gaining popularity among lenders and creditors. VantageScores were created by the three major credit bureaus: Equifax, Experian, and TransUnion, and range from 300 to 850, just like FICO Scores.
One key difference between VantageScores and FICO Scores is the way they calculate credit utilization. FICO Scores look at your current credit card balances and available credit limits, while VantageScores look at your credit card balances over time and compare them to your credit limits.
Another difference is the way VantageScores handle late payments. VantageScores ignore late payments if they are less than 30 days overdue, while FICO Scores penalize late payments regardless of how late they are.
VantageScores also take into account trended credit data, which looks at how borrowers’ credit behaviors have changed over time. This allows lenders to see whether a borrower’s credit habits are improving or worsening over time, and can provide a more accurate picture of their creditworthiness.
Overall, while there are some differences between VantageScores and FICO Scores, both aim to provide a snapshot of an individual’s creditworthiness. Understanding the differences between these scores can help you better manage your credit and make informed decisions about borrowing and lending.
Which Score Do Lenders Use Most?
While both FICO Scores and VantageScores are commonly used by lenders to evaluate creditworthiness, FICO Scores are still the most widely used credit scores. According to FICO, 90% of top lenders use FICO Scores in their credit decisions.
One reason for this is the fact that FICO Scores have been around much longer than VantageScores and are therefore more established. FICO Scores were first introduced in 1989, while VantageScores were not introduced until 2006.
Additionally, FICO Scores are still considered by many to be the gold standard of credit scores and are used by many mortgage lenders to make underwriting decisions. Some lenders may also use custom scores or industry-specific scores, but these are typically based on FICO Scores or VantageScores and may incorporate additional data specific to the industry.
It’s important to note that even if a lender uses a different score than the ones mentioned above, the factors that go into calculating the score are likely to be similar. Therefore, focusing on improving your credit habits and maintaining a good credit history can help improve your chances of being approved for credit, regardless of which score the lender uses.
Tips for Improving Your Credit Scores
Improving your credit scores can take time, but there are several steps you can take to boost your scores and increase your chances of being approved for credit.
Pay your bills on time: Payment history is the most important factor in calculating your credit scores, so it’s crucial to make all of your payments on time. Set up automatic payments or reminders to help ensure you don’t miss any payments.
Keep credit card balances low: Aim to keep your credit card balances below 30% of your available credit limit. High credit card balances can negatively impact your credit scores.
Check your credit reports regularly: Monitoring your credit reports can help you identify errors or inaccuracies that could be dragging down your scores. You’re entitled to one free credit report from each of the three major credit bureaus each year.
Limit new credit applications: Applying for multiple new credit accounts in a short period of time can lower your scores. Only apply for credit when you need it and avoid opening multiple accounts at once.
Maintain a mix of credit accounts: Having a mix of credit accounts, such as credit cards, loans, and mortgages, can help boost your scores. However, be sure to only take on debt that you can afford to repay.
By following these tips and maintaining good credit habits, you can improve your credit scores over time and increase your chances of being approved for credit.