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Understanding Credit Scoring Models: FICO, Vantage Score & Credit Scores Effects

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Before you make any major purchase, like a house or vehicle, a lender will pull your credit score. It is often called FICO for short, but both terms mean the same thing. FICO was the business that developed the credit score back in 1956.

The term stands for Fair, Isaac, and Company. It was the brainchild of two friends, Bill Fair and Earl Isaac. Though they started the company in the 1950’s, it wasn’t until 1989 that it became popularly used among lenders. It was the New York Stock Exchange that gets the credit for promoting it. Today, credit scores are used for employment, rentals, loans, and background checks.

Credit Scoring Models

When you open a credit account, it is reported to the three major bureaus. Currently, the credit reporting agencies are Experian, Equifax, and TransUnion. A lender does not have to report to them. However, they may choose to report to one or all of them. A credit account must be opened for at least six months before it can be rated, and the longer it is open the better. It is just as difficult to get credit with no credit as it is for someone with bad credit. The report takes many things into consideration, but it cannot take some important data. Though there is a place on the report for employment and addresses, those factors don’t weigh on your score. They look at the amount of credit you have open, the potential to run up debt or the debt utilization, and the number of inquiries to the account. Using a mathematical equation, the system figures your score. To get an 850 score, you must have the perfect blend of credit and no flaws at all. The following things can weigh your credit down:

•Student Loans
•Collection Accounts
•Slow Pays
•Too Many Inquiries For Credit
•Maxed Out Credit Cards
•Liens For Taxes
•Too Much Credit
•Too Little Credit

Lenders like to see a healthy mix of credit. For instance, the credit scoring model will rank you higher if you have a mortgage, car, and credit cards. A person who has just credit card accounts won’t get as high of a ranking. Additionally, you need to make sure that you stay within 30 percent of your utilization. For instance, if your credit card has a credit limit of $2,500, you should spend no more than $750 on that card. Anything over that amount will take points off your score. The current credit scoring models have not changed in some time. Those who have a score of 350 have the poorest of credit and will have a hard time getting any kind of financing. However, those who have a score of 850 will be able to buy almost anything they want. With scores that high, most lenders need no documentation and do a deal with little effort. The scores dictate what you can and cannot have in life, so it pays to work on them if they are on the lower end of the spectrum.

Understanding The Vantage Score

Unlike the FICO, the Vantage Score is rated a bit differently. You may have a really high number on a credit report and a lower number on the Vantage. That is because their scoring methods are different. Vantage is a product that was created by the major credit bureaus. It has only been around since 2006. Both the traditional credit scores and the Vantage use analytical data to predict the likelihood that a consumer will default on a loan. The Vantage evaluates the following:

•Payment History
•Age and Type of Credit
•Percent of Credit Limit Used
•Total Balances/Debt
•Recent Credit
•Available Credit

Unlike typical credit scores, Vantage uses a different scoring system. They give each consumer a grade, like in school. Here is their grading scale:

•A: 900–990
•B: 800–899
•C: 700–799
•D: 600–699
•F: 501–599

Due to the proprietary analytical methods used by both companies, the scores are nowhere similar. There are also discrepancies between the credit of a person on one model than the other, though many of these issues have been fixed. While the credit score is the most commonly used methods for lending, many companies are starting to use Vantage to help approve loans.

The Importance Of Good Credit

The credit score holds more clout than ever before. Forget the days being approved for a loan on your handshake and good name. Lenders today want assurance that bills will be paid in a timely manner. Thankfully, if your scores do dip below your comfort zone, you always have the option to rebuild. Though it takes time, improving your credit score and Vantage rating is imperative to have the things you need in life.