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If you’re looking for a home loan, personal loan, credit card or anything else that will lead to a debt repayment, the financial institution will want to know your credit score. Until recently, this was done almost exclusively by the Fair Isaac Corporation – better known as FICO.
Recently, however, another scoring company has emerged onto the credit reporting scene. VantageScore – established in 2006 – was formed as a joint venture by TransUnion, Experian and Equifax to compete with FICO.
Well, a credit score is a credit score, right? What’s the big deal about having another one on the market?
Each company calculates their scores differently. For you, this could mean a significant difference in how much interest you pay on your debt or whether or not you are extended a line of credit in the first place. There are other differences which will be explored below, as well.
FICO and VantageScore Formulas
Each model uses a weighted formula to arrive at your credit score. However, the categories and percentages used by each differs.
FICO considers the following categories at the listed percentages when determining your credit score:
- Payment history – 35 percent
- Level of debt – 30 percent
- Age of credit history – 15 percent
- Types of credit – 10 percent
- Credit Inquiries – 10 percent
Meanwhile, VantageScore considers the following categories at the listed percentages when determining your credit score:
- Payment history – 28 percent
- Utilization – 23 percent
- Balances – 9 percent
- Depth of credit – 8 percent
- Recent credit – 30 percent
- Available credit – 1 percent
Alright, that sounds way too confusing.
Let’s break the percentages down into simpler terms:
|Company||On Time Payments||Credit Use||Outstanding Balances||Credit History|
As we can see, each company pays strong attention to your payment history. Paying your bills on time (or not) can make or break your credit score.
The companies differ substantially on how they view responsibility.
Based on this analysis, VantageScore is much more interested in how you actually use your credit than FICO is. This means that you should think twice about co-signing for your 19 year old nephew’s new boat if you want a good VantageScore credit score!
Outstanding balances are also viewed with a different level of importance by each company. FICO plays much closer attention to your balances than VantageScore does.
In other words, if you want that new house and your lender uses FICO, a pile of debt won’t help.
Finally, according to this analysis, each company pays close attention to your recent credit history. For you, this means that you should carefully consider all credit offers before signing up for them. That $10,000 loan for a new kitchen may seem great, but your score may pay the piper!
What Your Score Means
Whether it is you, an employer or a financial institution that is looking at your credit score, an easy-to-understand score is important. Just think – if you had no idea about any of this and someone said that your credit score is 600, what would that do for you?
FICO offers scores from 300 to 850. According to Investopedia, anything below 620 will mean difficulty for obtaining credit. Anything above 650 is considered good, meaning that obtaining credit should not be too difficult. The higher the score, the better your credit history will be.
That seems simple enough. However, a novice borrower will have to search for this information or rely on his or her lender to explain it. In other words, it’s not fool proof.
VantageScore has a more consumer-friendly scoring system than FICO.
They offer scores from 501 to 990, with higher scores being better than lower scores. A key feature is that they also assign letter grades to each level of scoring, which are understood by most people.
The Vantage letter grades are as follows:
- A – score of 901 to 990
- B – score of 801 to 900
- C – score of 701-800
- D – score of 601-700
- F – score of 501-600
Comparing Use Cases of FICO and Vantage Scores
Now, imagine that this is your first day on the job as a lender.
You know nothing about credit scores when the first customer walks in. You’re told that she has a FICO score of 450 and a VantageScore credit score of 575. Would you know what either score really means?
Then, you’re then told that the VantageScore credit score equates to a “F” grade, meaning that you probably don‘t want to lend to this person.
See the importance of that simple lettering system?
FICO still dominates the credit score market. In fact 90 of the largest 100 US financial services institutions use FICO scores. This compares to VantageScore’s share of the market, which is less than 10 percent, according to the site.
For you, this means that a FICO score is more important than a VantageScore credit score. The odds that your next creditor will use a FICO score are overwhelming. Thus, it is more important to have a strong FICO score as opposed to a strong VantageScore credit score.
For now, FICO remains on top of the credit score market. Your favorite financial institutions most likely use this score.
While you may or may not agree with how your score is determined, it is a fact of life these days. Thus, if you will require credit in the future, it is best to keep your FICO score up.
Keep an eye out for VantageScore, though, as they have made a dent in the market in just five years!