VantageScore is a new scoring technique, the first one that was developed collaboratively by the three credit reporting companies. This model provides a more predictive score for consumers, even for those with limited credit histories, which reduces the essential need for creditors to manually review credit information.
VantageScore features a common score range of 501-990 (higher scores represent lower likelihood of potential risk). A key benefit of VantageScore is that as long as the three major credit bureaus have the same information regarding your credit history, you will receive the same score from each. A different score alerts you that there are discrepancies in your report.
Historically, FICO has been the most well known credit scoring system. The information in your credit report is used to calculate your FICO credit score, a number generally between 300 and 850 that rates how risky a borrower you are. The higher your score, the less risk you pose to creditors. Your FICO score is available from www.myfico.com for a fee.
FICO SCORING SYSTEM
FICO score is based on your financial history as collected in your credit report. Creditors can use this score to evaluate whether you are able to pay a loan back on time. The higher the score the more likely you are to pay off a loan on time and the less of a credit risk you pose.
The FICO or credit score ranges are broken down as follows:
720-850 - This represent the best score range
700-719 - Able to obtain favorable financing terms
675-699 - This is still considered a decent score range
620-674 - May have trouble getting good credit terms
560-619 - May have trouble securing credit
500-559 - Time to work on improving your score
Although the exact formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following five components and the approximate weighted contribution of each:
- Payment History – 35%
(only includes payments later than 30 days past due)
- Amounts Owed – 30%
(credit card balances, etc. & credit limits, debt ratio)
- Length of Credit History – 15%
- Types of Credit Used – 10%
(installment, revolving, consumer finance)
- New Credit – 10%
(amount of new credit recently obtained)
This series of articles from the Money Book by Jeff Burch will continue tomorrow with an article titled Tips to Improve Credit Scores.