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There are 21.1 million outstanding personal loans in the U.S. Consumers take out personal loans for a variety of reasons, including to consolidate debt, take a dream vacation, to finance a home improvement project, and so much more. But to get the best possible rates for a personal loan, it’s important to understand what your credit score is, and how it is calculated. Read on to understand the differences between VantageScore vs. FICO (the two primary scoring methods in the U.S.) and what you can do to boost your credit score.
Highlights & Key Takeaways
- FICO and VantageScore credit scores help lenders to determine a borrower’s creditworthiness.
- FICO and VantageScore credit scores both range from 300 to 850, but each company uses a different model to calculate credit scores.
- Adopting the same set of good financial practices can positively impact your credit scores with FICO and VantageScore.
- The steps to improve both your FICO and VantageScore are the same - make your payments on time, keep credit utilization under 30%, be mindful when applying for new credit, etc.
How FICO and VantageScore Are Different
FICO and VantageScore are two popular credit scoring models widely used by lenders and financial institutions to assess your creditworthiness. While both models aim to provide a snapshot of an individual's creditworthiness and offer credit scores ranging from 300 to 850, there are some key differences between the two. Understanding the differences between FICO and VantageScore can help you better understand how your credit score is calculated and how to improve it.
Your credit history is an essential factor that the scoring models consider when generating your credit score. On the borrowing side, lenders want prospective borrowers to have a history of good behaviors, such as paying their bills on time and managing their debt. Further, it’s essential to understand that your credit score takes some time to generate after you are approved and accept your first credit product, such as a credit card, personal loan, or auto loan.
The FICO score takes at least six months of credit history to generate your score. VantageScore, on the other hand, only requires one month of credit history. You can anticipate having a score with FICO and VantageScore within one to six months after getting a loan or a credit card.
Every time you apply for credit, whether it be a personal loan for good credit, a new credit card, a loan to finance a new car, or even a mortgage, the prospective creditor or lender will initiate a hard credit inquiry. A hard credit inquiry results in a small ding to your credit report of five points, which will remain on your credit report for up to two years. Hard credit checks are done when you formally apply for a credit product, and the creditor or lender must decide whether to approve you.
You should also know about soft credit inquiries. A soft credit check occurs when you, a lender, creditor, or even your employer, examine your credit report. Credit card issuers or mortgage lenders want to review your credit to preapprove you for an offer. And employers often look at a credit report to see if you show signs of financial responsibility. Since soft inquiries are not linked to a specific credit application, they do not affect your credit scores.
This all said, applying for multiple lines of credit means multiple applications in a short period.
- FICO counts multiple credit inquiries within 45 days as one inquiry to minimize the negative impact on your credit score.
- VantageScore counts multiple credit inquiries within 14 days as a single inquiry.
The most critical factor in your credit score calculation, regardless of VantageScore or FICO score, is your payment history. Your payment history represents 35% of your FICO score and 41% of your VantageScore. This means you must ensure you can make your minimum monthly payments every month. Failing to make a payment on time and not making it up within 30 days can cause your credit score to tank by as much as 180 points.
But beyond that, when you start missing payments or fail to pay the minimum amount regularly, the lender or creditor may assign your account to a collection agency or sell it to a debt buyer. This process typically happens a few months after you become delinquent. Lenders and creditors will usually try to contact you through letters or phone calls regarding the debt before it is handed over to a collection agency. However, you may be unaware if your account is being sold to a debt buyer. The collection agency or debt buyer will then attempt to collect the debt from you.
Accounts in collections can hurt both your FICO and VantageScore credit scores, but the two models don’t always weigh them the same.
- VantageScore 3.0 and 4.0 ignore paid collections accounts and unpaid medical collections accounts.
- FICO Score 9, however, ignores paid collection accounts and places less emphasis on unpaid medical collections. But FICO Score 8 does not ignore paid collection accounts and does not differentiate between medical and non-medical collections, according to Experian.
What is FICO Score?
FICO, more formally referred to as Fair Isaac Corporation, is a data analytics company that specializes in credit scoring and decision-making services. The FICO Score, which you have probably heard of is a credit scoring model widely used by lenders and financial institutions today that was first introduced in 1989.
Since then, FICO has continued to refine and improve its scoring models to predict credit risk better and provide insights to lenders about a consumer’s creditworthiness. Today, FICO scores are used in over 90% of all lending decisions in the U.S. In addition to credit scoring, FICO provides various analytics and decision-making tools to help businesses in various industries make better data-driven decisions.
Your FICO score is calculated using complex algorithms that examine credit-related factors such as your payment history, credit utilization, how long you have had credit, and your credit diversification.
FICO Credit Score Calculation
FICO credit scores are calculated using the information on your credit report. The factors and how much weight are put against them are listed below. And as you can see, the most important factor in your FICO score is your payment history.
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
FICO Credit Score Ranking
FICO created various score ranges to help consumers understand if they have a good or bad credit score. This information can help you to know if you are more or less likely to have access to low-interest rates, high borrowing limits, and flexible borrowing terms. Currently, in the U.S., the average credit score is 714, which fits right in the middle of the good range.
FICO credit scores fall between 300 and 850 and are grouped as follows.
- 300 to 579: Poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very good
- 800 to 850: Exceptional
Different FICO Credit Score Models
FICO has developed various versions of its credit scoring model over the years to meet the specific needs of different industries. While FICO Score 8 remains the most widely used version of the model, followed by FICO Score 9, several other versions are tailored to different lending purposes, including auto lending, mortgage lending, and credit card decisions. Here's an overview of the various FICO score versions:
Used for credit card decisions:
- FICO Bankcard Score 9
- FICO Bankcard Score 8
- FICO Bankcard Score 5
- FICO Bankcard Score 4
- FICO Score 3
- FICO Bankcard Score 2
Used for auto lending:
- FICO Auto Score 9
- FICO Auto Score 8
- FICO Auto Score 5
- FICO Auto Score 4
- FICO Auto Score 2
Used for mortgage lending:
- FICO Score 5
- FICO Score 4
- FICO Score 2
The newest versions:
- FICO Score 10
- FICO Auto Score 10
- FICO Bankcard Score 10
- FICO Score 10T
Lenders and financial institutions may use different versions of the FICO score depending on the type of credit they're offering. This means that the credit score you see may differ based on the version your lender decides to use. So, keep this in mind when looking at your credit score. Instead of focusing on differences of five, ten, or even twenty points between your scores, look to see if there are wide gaps that could indicate one of the bureaus (Experian, Equifax, or TransUnion) has made an error.
What Is a VantageScore?
VantageScore was developed in 2006 as a joint venture between the three major credit reporting agencies (Experian, Equifax, and TransUnion) in response to the need for a more consistent and standardized credit scoring model. Before VantageScore came into play, each credit reporting agency had its own proprietary credit scoring model, which could lead to inconsistencies in credit scores for the same consumer.
The credit bureaus wanted to create a more uniform and transparent credit scoring system by utilizing a similar scoring range and criteria across all three credit bureaus. Additionally, VantageScore was designed to incorporate more data sources and factors into its scoring model, including non-traditional credit data such as utility bills and rental payments, to provide a more holistic view of your creditworthiness.
Not all that different from FICO, VantageScore is calculated using sophisticated algorithms that analyze credit-related factors such as your payment history, credit utilization, length of credit history, and credit mix.
VantageScore Credit Score Calculation
VantageScore credit scores are calculated based on the information available in your credit report, just like FICO. However, there are six factors instead of five, and different factors are assigned different weights. Your payment history remains the most crucial factor in determining your VantageScore credit score.
VantageScore 4.0, which was released in 2017, weighs six different factors:
- Payment history: 41%
- Depth of credit: 20%
- Credit utilization: 20%
- Recent credit: 11%
- Balances: 6%
- Available credit: 2%
VantageScore Credit Score Ranking
Again, similar to FICO, VantageScore created various score ranges to help consumers understand if they have a good or bad credit score. And since knowledge is power, knowing how your score is calculated can help you understand what you need to do to improve it if it is lower than you want it to be.
VantageScore credit scores range from 300 to 850:
- 300 to 600: Subprime
- 601 to 660: Near prime
- 661 to 780: Prime
- 781 to 850: Superprime
Prime and subprime lending are often mentioned in the news as they play a critical role in the overall health of the U.S. economy. Prime lending refers to loans to borrowers with good credit scores and stable financial histories. In contrast, subprime lending involves loans to borrowers with lower credit scores or more significant financial risks.
During economic downturns, subprime borrowers are often hit the hardest as they may be unable to keep up with loan payments, leading to a greater risk of loan default and accounts sent to collections. This can negatively affect the rest of the economy too, as lenders and financial institutions may suffer losses, leading to a tightening of credit availability and decreased consumer spending.
Different VantageScore Credit Score Models
When built, credit models are not intended to be a one-and-done approach to credit scoring. As new data becomes available, credit scoring models are updated, and new versions are released. And each of these models has variations in its formula. But don’t assume that all lenders naturally shift to the new models when released. Many decide to stay on earlier versions due to the overhaul required to make changes for newer models.
The different VantageScore models are:
- VantageScore 1.0: This was the first version of the VantageScore model and was introduced in 2006. Most lenders no longer use it.
- VantageScore 2.0: This model was released in 2011 and included updates to the scoring formula, such as a focus on trending data and a reduction in the impact of paid collections.
- VantageScore 3.0: Introduced in 2013, this model refined the scoring formula by emphasizing paid collections and less medical debt.
- VantageScore 4.0: This is the most recent version of the VantageScore model introduced in 2017. It includes new features such as machine learning algorithms and trended credit data, which can give lenders a more accurate assessment of your ability to take on new credit.
What Lenders Use FICO and VantageScore?
The beauty of having two different primary scoring methodologies is that it provides lenders with flexibility versus giving one organization a monopoly. And lenders have various reasons as to why they choose VantageScore vs. FICO or the other way around. Lenders have industry preferences that help them determine which way to go, and in some cases, one score may be easier to implement than another. Further, FICO and VantageScore use different algorithms and weighting systems, so your FICO score may differ from your VantageScore. A lender may choose one score over the other based on which model aligns better with their risk tolerance and lending practices.
90% of top lenders use FICO credit scores, and an estimated 2,600 financial institutions use VantageScore credit scores. You may not know which of your credit scores a lender uses unless your application is denied.
Boosting Your Credit Scores
If your credit score falls below the U.S. average of 714, or falls in the fair or poor categories for FICO and near prime or subprime categories for VantageScore, you may want to take some steps to improve your credit score. Improving your credit score can open the door to more opportunities, such as providing you with lower interest rates and higher borrowing limits.
Plus, some employers may check your credit to assess your financial responsibility, to verify information in your job application, or as part of a background check. The higher your score, the better you will be perceived.
Regardless of which scoring model or version is used, here are some things you can do to improve your credit score.
- Build your credit file. Consider tools like a secured credit card or credit builder loan, especially if you are building your credit from scratch or you need to make a significant improvement.
- Always pay your bills on time, and remember that your payment history reflects between 35% and 41% of your credit score. If you forget to make your payments on time, consider signing up for autopay.
- Manage your credit utilization, which compares your credit balances to your credit limits. Aim to keep your utilization at 30% or below.
- Only apply for new credit when you need it. Applying for many new credit accounts quickly can hurt your score. A rule of thumb is to wait six months between credit applications when possible.
- Be patient. Building your credit can take time, and though you may see a small improvement to your credit in as little as 30 days, the chances are that it will take longer to achieve the type of change you desire.
Both FICO and VantageScore credit scores are important for lenders to determine your creditworthiness. While there are some differences in how they are calculated, both models consider similar factors like payment history, credit utilization, and length of credit history. Remember that you may have different FICO and VantageScore credit scores, but you have the power to improve both by paying bills on time, reducing debt, and keeping your credit utilization low.