Knowing your credit risk score (or “credit score”) and consistently trying to improve on that score is an important aspect of adult-life. Consumers with higher credit scores have an easier time getting approved for loans, mortgages, and rental housing, so achieving a score as close to 850 as possible is the ultimate goal in order to make life easier. While you certainly know where your credit risk score stands, do you know how your score is being calculated? Take a look at the most commonly used versions of FICO® and VantageScore®, and the benefits your credit score might see from understanding key elements to improve it.
“What is a credit risk scoring model?”
VantageScore® and FICO® are two of the most used credit risk score models that generate easy-to-read results on millions of consumers (aka you, and your rental applicants) by taking a consumer’s credit information and analyzing it through their own formulas. Keep in mind, these credit risk formulas can differ depending on the purpose of the report, so a credit score for a car loan might not be scored the same as resident screening. While other, less-reputable scoring models might differ in range, both VantageScore® and FICO® have credit score ranges between 300 and 850. The higher your credit score, the more likely you’ll be seen as “low risk” to banks, credit card companies, and apartment complexes.
FICO® Score 8
FICO® was developed by the Fair Isaac and Company in 1989 and is one of the oldest and most recognized credit scoring models out there. Since 89’ the company has revised its credit risk score model multiple times, with FICO® Score 8 being one of the more recent (and most widely used) versions. According to myFICO®, these are 3 notable features that make version 8 stand apart from the others:
- High credit card usage
FICO®’s credit scoring model has always seen high credit card usage as indicative of high risk, but version 8 takes that to a new level. Consumers who frequently generate a high balance on (or max out) their credit card’s limit, will see an impact on their FICO® score.
- Isolated late payments
If you were 30 days late with a payment, older versions of FICO® would deduct a few points off your credit risk score. Now with FICO® Score 8, as long as the late payment is a one-time deal and your other accounts are in good standing, you won’t be impacted as much.
- Small-balance collections accounts
FICO® Score 8 does not factor in small-dollar collection accounts with an original balance of less than $100.
The VantageScore® model was developed in 2006 by the 3 major credit bureaus (Experian, TransUnion, and Equifax). Unlike FICO® — which is an independent credit scoring company that gets its information from the bureaus to generate a risk score – VantageScore® cuts out the middleman by directly sourcing from the bureaus’ data. Their access to credit reporting data enables VantageScore® to score 30-35 million more adult consumers with “thin credit files” (like those who are new to establishing credit or use credit infrequently, and would oftentimes not have a credit score). Here are 3 notable features VantageScore® 3.0 boasts:
- Greater segmentation of data
VantageScore® 3.0 further distinguishes mortgage loans and installment loans in their algorithm. By breaking down their classifications (for example, real estate loans segment further into first mortgages, lines of credit, and home equity loans), the VantageScore® 3.0 model can more accurately predict a consumer’s credit risk score.
- More stable credit scores
As we know, an economic crisis can greatly affect consumers’ credit lines, payments, etc. In order to more accurately generate a consumer’s credit risk score, VantageScore® 3.0 takes data from 2009-2011 and 2010-2012 (plus the end of the housing crash) to make the model more stable to great economic fluctuations.
- Data consistency
No matter what credit bureau data comes from, if that record is present in at least 2 credit reporting companies, then it’ll be on your credit report.
Know what else is on your credit report
Although FICO® or VantageScore® only deal with the credit score, as these models generate your credit risk score from the credit information the 3 credit bureaus have, it’s important to know what else is on your credit report. This is especially important if you’re trying to acquire a bank loan or apply for a rental property. The credit report shows things like a summary of your positive and negative credit accounts (also known as tradelines), your total estimated past due and monthly debts, a breakdown of your accounts, and payment history. It will also tell creditors if there have been any prior credit inquiries, and when the inquiry was made.
Quick Tip: Make sure your credit information is safe after the recent Equifax data breach by using a credit monitoring service. Get a free trial (and $3 off each month) by using Identity Guard.
With the bulk of the credit bureau’s National Consumer Assistance Plan (NCAP) in effect, both credit scoring models are aiming to upgrade their formulas to adapt to the credit changes. VantageScore® 4.0 is expected to be released this fall. FICO® Score 9 (the most recent version) has been released since 2016, but it is not the most widely used credit risk scoring version. It is uncertain whether the NCAP changes will be applied to version 8 in addition to version 9. As you make a conscious effort to improve your credit risk score, take the time to get familiar with these two credit risk score models. You wouldn’t want to do anything that causes you to lose a few points.
Do you have a favorite credit risk score model? Let us know in the comment section below and subscribe!
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