FICO Score vs VantageScore: What You Need to Know. Whether you're purchasing an investment property or buying a new car, your credit history affects how much you pay for financing. Understanding your credit score and how you can improve it can save you thousands of dollars on your next loan. If you're interested in earning the lowest prime rates, you need to know about the two major scoring models: FICO and VantageScore.
What Is a FICO Score?
FICO is a proprietary consumer credit scoring system developed by the Fair Isaac Corporation. The company has been around since the 1950s, but it didn't hit the mainstream mortgage market until the mid-1990s, when it was adopted by Fannie Mae and Freddie Mac.
Credit Scores for Mortgages
There are several different scoring formulas and a number of industry-specific algorithms. For example, if you're financing a rental property, the lender will request your residential mortgage credit report (RMCR), which incorporates data from all three bureaus. The typical range for a FICO score is between 300 and 850, with higher scores indicating lower credit risk.
How Many Lenders Use FICO Scores?
According to the Fair Isaac Corporation, its financial products are used in 75% of mortgage originations. It's also the gold standard for the country's 25 largest auto lenders and 91% of the nation's largest banks. Proprietary algorithms analyze information that's reported to the credit bureaus, and the results determine your FICO score.
- Your payment history represents 35% of your credit score. Late payments, bankruptcies, collections, court judgments, and liens will all lower your credit rating.
- Credit utilization determines 30% of your score. This includes your debt-to-credit ratio and the number of your open accounts with outstanding balances.
- The age of your accounts influences 15% of your credit score. Scoring models look at the average age of your accounts as well as your oldest line of credit.
- 10% of your score is based on credit applications. Although hard pulls appear on your credit report for two years, this scoring model only looks at the past year.
- The remaining 10% of your credit rating is based on your mix of credit, including revolving charge accounts, installment loans, and mortgages.
What Is a VantageScore?
VantageScore is an alternative credit rating system that was developed in 2006 as a joint venture between Equifax, TransUnion, and Experian. You're most likely to encounter your VantageScore through credit monitoring services and free sites like Credit Karma, LendingTree, and Quizzle. These are often called educational credit scores because they're widely distributed to consumers but are seldom used by lenders.
The Scoring System
Before VantageScore 3.0 was introduced, one major difference was the scoring range between 501 and 990 points. However, VantageScore now uses the same numerical system as the Fair Isaac Corporation. The other difference is how consumer behaviors are weighted. According to VantageScore Solutions, these are the most important factors:
- Payment history is extremely influential. It represents the largest portion of your score.
- The next most important factors are the age and type of your accounts and the percentage of the credit limit used.
- VantageScore considers your total balances or your amount of debt to be moderately influential.
- Recent credit applications and the amount of available credit are less important under the VantageScore model.
Although there are different scoring systems and approximately 56 to 60 different algorithms, the most important factors are generally the same. To earn the best rates on mortgages and other financial products, experts recommend keeping your credit utilization below 30%, avoiding missed payments, and limiting unnecessary credit applications. By following these simple rules, you can improve your score, get lower rates, and save thousands of dollars on interest.
If you enjoyed this article, be sure to check out the next article in our series on ways to boost your credit score: https://fibyrei.com/ways-to-boost-your-credit-score/