By: Preston Mangus and Wesley Hurlock
Nowadays, it seems that almost everyone you deal with wants to pull your credit. That’s because, now more than ever, your credit score can be used by many organizations to determine the pricing model for certain services you use and the purchases you make, from applying for a credit card to purchasing a home. Many employers even check the credit scores of job applicants to determine if the candidates are the right fit for the company.
The purpose of a credit score is to provide a lender or vendor a prediction of your future consumer behavior, based on your credit history. There are many different credit reporting models, but today there are two competing models being primarily utilized: FICO® and VantageScore.
FICO, previously known as Fair Isaac Corporation, has been the main provider of modern credit scores, and it’s the only score used by most mortgage lenders to determine your eligibility for a home loan. They take data from the three major credit rating bureaus—Trans Union, Experian and Equifax—and develop a score based on a mathematical interpretation of your credit history and activity to produce predictable outcomes for your future behaviors.
In 2006, these credit reporting bureaus joined forces to create a new scoring model, VantageScore, which is rarely used by lenders when it comes to mortgage loans, but uses alternative data like rent, utilities and phone bill payment history to estimate your credit score. Last year, VantageScore announced their new method for calculating credit scores, VantageScore 4.0, which also takes into account how you pay off your debts on a monthly basis, how many large-limit credit cards you have, and more.
So we know that FICO and VantageScore are two different credit scoring models … but what exactly sets them apart? Let’s compare the two to see how they match up.
FICO and VantageScore aren’t completely different from one another. In fact, they do share some similar traits. Both models now report credit scores using the same scoring range—300 being the lowest score, and 850 being the highest. They also base scores on an analysis of similar data points:
While FICO and VantageScore share similarities, they also have significant differences. FICO uses millions of credit reports and compounds that data as it relates to your credit profile. This model requires time to factor into the algorithm, and it needs to look deeper into your credit history (at least six months) to develop your score. VantageScore needs only one month of history and one credit account that’s been reported over the past two years. So, folks with newer credit profiles might prefer to utilize the VantageScore model for their needs.
You can check your VantageScore for free on websites like Credit Karma, Credit Sesame and WalletHub. Checking your FICO score, on the other hand, usually requires a fee; however, you can get one free credit report from each of the three credit bureaus every year by visiting AnnualCreditReport.com.
Late payments can greatly impact your score on both models, specifically:
FICO evaluates all late payments equally. VantageScore, however, puts special emphasis on mortgage payment history in their calculations.
There are two types of credit inquiries: hard and soft. A hard inquiry is made any time you apply for new credit, like opening a new credit card. A soft inquiry, or “soft pull,” is a recurring inquiry on an existing trade line, like an insurance policy renewal. Soft pulls are used by organizations to look for material changes in your score and evaluate whether they should continue or modify their relationship with you.
Only hard inquiries are counted by the bureaus, and too many of them can negatively affect your score. Luckily, multiple hard pulls made within a specified amount of time are categorized as a single pull. So, if possible, try to cluster your VantageScore inquiries within a 14-day timeframe, and your FICO inquiries within a 45-day timeframe. That means if you’re shopping around for a new car or home and want to minimize the impact of multiple hard inquiries, try not to take too long to make your final purchase decision!
In their credit score calculations, VantageScore ignores paid collection accounts and discounts medical collection accounts. FICO ignores all collections where the original balance is below $100, as well as paid collection accounts. Remember, legitimate negative information will haunt your credit report for up to seven years!
Your credit score is the highest influencer on your financial situation. A low score will significantly increase your expenses, usually in the form of higher interest payments, while a high score will earn you lower interest rates and more savings. Follow these practices to get your best possible score in either model:
Armed with this information, you can use your credit score to your advantage and protect your score aggressively. Be sure to ask your vendor/lender which model they are using in your credit decision—it could make a big difference!
Now we want to hear from you! Tell us in the comments below: How often do you like to check your credit score, and how do you keep it in shape?
For more information about credit reports and scores, check out the Consumer Financial Protection Bureau website.
The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. VyStar Credit Union disclaims any liability for decisions you make based on the information provided.