A credit score can help lenders and others predict how likely you are to pay your credit obligations on time in the future, based on your past credit behaviors. But it’s important to understand that you have more than just one credit score.
Both credit scores and credit reports play key roles in your financial life. As a result, it’s essential to understand the main types of credit scores and how they work. We’ll explain.
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What are the main types of credit scores?
FICO® scores and VantageScore credit scores are the two most popular types of credit scores that lenders use in the United States. Both score developers have credit risk models that range from 300 to 850. Earning a higher credit score tells lenders that you’re more likely to pay future credit obligations on time, while a lower score indicates there could be a higher risk for late payments.
Yet despite the similarities, there are some notable differences between FICO scores and VantageScore credit scores. Here’s what you need to know about these two popular credit score types.
FICO scores
When you apply for a loan, credit card, mortgage, or any other type of financing, there’s a good chance the lender will review your FICO Score as part of your application. FICO scores, which the Fair Isaac Corporation (now known as FICO) introduced in 1989, were the first standardized credit scores based on data from the major credit bureaus.
In the United States, 90% of top lenders rely on FICO scores. As a result, it’s wise to check your FICO Score before you apply for new financing to know where you stand.
Think you’re ready to apply for a credit card? Check out our list of best credit cards to find one that’s right for you.
VantageScore credit scores
In 2006, the three major credit bureaus (Equifax, Experian and TransUnion) partnered together to form VantageScore Solutions and develop a credit scoring system of their own — the VantageScore. According to the company, it sells billions of VantageScore credit scores every year to banks, lenders, and consumers. Furthermore, thanks to changes in the mortgage industry, lenders will eventually use VantageScore credit scores alongside FICO scores to review applications for both Fannie Mae and Freddie Mac home loans.
This means it’s a good idea to review your VantageScore credit score before you apply for new financing. The more information you have about your credit scores (and the details on your credit reports), the better prepared you can be as you shop around for the best deal on a loan, credit card or other borrowing options.
Why are there different credit scores?
Credit scores are based on the same basic information — details from your credit reports with Equifax, Experian or TransUnion. Yet similar to how you might encounter competition within other industries, credit score developers also create competing products and attempt to market their products to lenders as the “best” performers.
Just as an auto manufacturer may advertise their vehicles as superior to others, a credit score developer might advertise key benefits of its credit scoring system in an effort to increase sales. Of course, it’s up to the customers (e.g., lenders, banks, and other credit score users) to decide which credit scores to purchase and use as risk assessment tools.
Another reason there are different credit scores is because credit score developers often release newer versions of their scoring models (think 1.0, 2.0, 3.0, etc.). The credit behaviors of consumers change over time. So, it’s important for companies like FICO and VantageScore to continuously examine how those behaviors adjust and how they impact credit risk to make sure the credit scores that lenders use remain as accurate as possible.
How your credit score works
Credit scores predict how likely you are to make a late payment (90 days or worse) in the next 24 months. They accomplish this goal by examining the details on your credit report.
FICO and VantageScore don’t use the same formula to calculate your credit score. However, both types of credit scores examine many of the same factors on your credit report.
Below are some of the key factors that have the potential to influence both your FICO and VantageScore credit scores.
- Payment history: How you pay your credit obligations (e.g. on time or late) will have a meaningful impact on your credit score. In fact, 35% of your FICO Score comes from the payment history details on your credit report. Meanwhile, VantageScore® Solutions states that payment history is moderately influential over the credit scores the company develops.
- Amounts owed: The amount of debt you carry can also affect your credit score, especially your credit card debt. Your credit utilization ratio in particular — the relationship between your credit card limits and balances — may play a major role in your credit score calculation.
- Length of credit history: The age of the accounts on your credit report can also influence your credit score. With FICO scores, 15% comes from your length of credit history. The same category of credit information (age of credit history) impacts your VantageScore credit score as well, though these details are less influential than other credit score factors such as payment history, total credit usage, balance and available credit.
- Credit mix: Scoring models also examine the types of accounts on your credit report and may reward you if you have a healthy mixture rather than a single category of credit (i.e., installment accounts such as an auto loan or mortgage and revolving accounts such as credit cards, versus just one variety).
- New credit: It’s smart to not apply for too much new credit in a short period of time or you’ll risk having too many hard credit inquiries on your credit report. New credit (including credit inquiries and other factors) makes up 10% of your FICO Score. New accounts opened affects your VantageScore credit scores too, but like age of credit history, it’s a less influential credit score category compared to others.
Why good credit is important
Most credit scores that FICO and VantageScore develop range from 300 to 850. Each lender decides for itself what is a “good” credit score. In general, a FICO Score of 670 or higher is good, very good, or exceptional. With VantageScore credit scores, a score of 661 or higher is usually considered to be good or excellent.
There are many benefits of a good credit score. When you work hard to earn and keep good credit, you may be able to enjoy valuable perks like:
- Better chance of approval for loans, credit cards and other types of credit.
- Superior financing offers from lenders and credit card companies (e.g., lower interest rates, lower fees, higher loan amounts, higher credit limits, etc.).
- Lower insurance premiums on car insurance, homeowners insurance and more.
- Low (or no) security deposit requirements when you apply for new utility services, lease an apartment, establish new mobile phone service, etc.
Overall, good credit can often open the door to better financial opportunities. It may also help you save money in a variety of ways.
Frequently asked questions (FAQs)
In the United States, any credit scores used in lending must follow federal guidelines. According to the Equal Credit Opportunity Act (ECOA), all credit scores lenders use must be able to predict risk accurately. However, even though all credit scores are accurate, some might be able to do a better job of predicting risk than others.
The majority of top U.S. lenders (90%) use FICO scores, according to the company. However, VantageScore solutions sells billions of its credit scores every year as well, to both consumers and lenders alike.
Most FICO scores have an overall range of 300 to 850. Within the overall FICO Score range, certain score ranges may communicate different information to lenders and others about your credit risk level.
- FICO scores of 300 to 579: Poor.
- FICO scores of 580 to 669: Fair.
- FICO scores of 670 to 739: Good.
- FICO scores of 740 to 799: Very good.
- FICO scores of 800 to 850: Exceptional.
There are many reasons why your credit score might look different each time it’s calculated. Credit scores calculated based on different credit reports (e.g., Equifax vs. Experian) can result in different numbers. Likewise, if one lender calculates your credit risk using a FICO Score and another uses a VantageScore credit score, the results are unlikely to match. Even if two lenders use the same credit score brand, such as FICO, they might use different versions of the scoring model, and so your results might vary.
