Your credit can impact just about everything in your daily life. It can impact the type of car you are able to purchase, the type of home you can buy and the type of job you are able to get. Most lenders base their decision to extend you credit and at what rate on your credit score. Further complicating matters, not all lenders look at the same score and use different credit scoring models to make a decision about your credit worthiness. As discussed in previous blogs, a credit score is what results when your credit report is run through a mathematical equation – or algorithm – and a numerical value is the result. Most consumers don’t know that there are a large number of different algorithms used depending upon the industry.
The FICO Model
The most well known scoring models come from FICO, or Fair Isaac Corporation. FICO alone has almost 50 different scoring models that it provides to lenders upon request. First introduced in 1989, FICO is considered the most reliable scoring model. FICO and its ever changing scoring methods keep up with our growing economy. The original FICO scoring model assigns consumers a number between 300 and 850. Scores below 600 are considered a poor credit rating, while scores above 750 are considered excellent.
In 2009 FICO introduced FICO 8 which was widely used by lenders because it based its scoring model on consumers carrying balances close to their credit limit. In 2014, FICO introduced its newest scoring model, FICO 9. This model provided lenders with a credit score without including unpaid medical bills in its calculation. Regardless of which scoring model a lender chooses to use, all FICO scores use five factors to determine your score. These five factors include payment history, credit utilization, credit history, type of credit, and new credit.
The VantageScore Model
In an effort to compete with FICO, in 2006 the VantageScore model was created by the three major credit reporting agencies, Experian, Equifax and Trans Union. This scoring model takes into account consumer data including timely payments, credit utilization, age of credit accounts, bank accounts and additional assets, when calculating a credit score. The newest model, VantageScore 3.0, only requires a consumer to have one month of credit history to calculate a score as opposed to other scores like FICO that require a six month credit history. Furthermore, VantageScore 3.0 does not take into account collection accounts for less than $250 or debt resulting from natural disasters. VantageScore, just like FICO, is a number between 300 and 850 but you are also assigned a letter grade A through F to help you better understand where you fall.
So while there are a variety of different scoring models, the same concepts apply for each…your credit score is a numerical representation of your credit worthiness. Use your number as a starting point for whether or not you need to improve upon your credit standing. For more information on your credit report or credit score contact SmithMarco P.C. for a completely free case review.