Understand Your Score
How Is My Credit Score Calculated?
Until recently, scores were generally not available to consumers because many contracts between lenders and their credit bureaus specifically limited disclosure of this information. Due to changes in the FCRA (Fair Credit Reporting Act), you are now entitled to request credit score information as part of your disclosure.
A credit score is a statistical evaluation of an individual’s ability and willingness to repay credit cards and loans as agreed. Mortgage lenders, brokers and other types of credit grantors use scores to evaluate a consumer’s ability to take on additional debt. The numerical credit score is based on a combination of financial, demographic and credit history information, which allows the lender to evaluate whether credit should be extended.
All credit score models are not exactly alike. Several companies develop score models, which they sell to lenders. Others provide score models to Consumer Reporting Agencies, which market this service to lenders. This is important to keep in mind as your score may differ based on the type of score and from whom the statistical information is obtained.
In mortgage lending, Fair Isaac (FICO) is a commonly used scoring company that bases their model on consumer credit information. Each credit scoring model looks at the credit information contained in the files from TransUnion, Equifax or Experian and develops the score based on this data. FICO scores range from a low of 300 to a high of 850, depending upon the credit repository and model used. A score at 620 or better is generally required to obtain standard financing at competitive rates. Mortgage lenders usually require a minimum of two, and preferably three scores from the national credit repositories. Each lender devises which of the scores, or combination, are used for making a credit decision.
While the exact mathematical formula for generating a score is a trade secret, some factors that might be considered are:
Information on a Credit Report
- Credit payment history
- Types of credit
- Overall current and available credit debt
- Monthly payments and average balances maintained
- Public record information
Information on a Credit Application
- Length of time at current and past residences
- Current length of employment
- Salary and investment income
- Checking and savings accounts
The credit score is a dynamic product and cannot easily be improved. One way to improve your score is to constantly pay bills on time. Think of a score as a “snapshot” of credit risk – it reflects your risk picture at a specific point in time. A snapshot doesn’t change, but when you take another one, you will probably look a little different. Similarly, when your credit information changes, your score changes to reflect that.
For more detailed information about FICO scores, visit Fair Isaac atwww.myfico.com.
Other Scoring Models
VantageScore, created by Experian,are generic scoring modelscreated for use by a wide range of creditors, such as private student loan companies, online lenders and card issuers. You might check your VantageScore and FICO® credit scores and wonder why they’re different. In part, it’s because the models give varying levels of importance to different parts of your credit report.
VantageScore vs. FICO Credit Scores
While VantageScore and FICO® scores try to predict the same thing, their credit scoring models aren’t identical. Here are some of the main differences between the two companies and their scores:
Tri-Bureau vs. Bureau-Specific Models
VantageScore creates a single tri-bureau model that can be used with a credit report from Experian, Equifax or TransUnion.
FICO® creates bureau-specific scoring models. So, while the latest FICO® Score 9 might have one name, there are actually three slightly different FICO® Score 9 models—one for each of the major credit reporting agencies.
Minimum Scoring Requirements
For FICO® to create a credit score based on one of your credit reports, you’ll need to have a credit account (or “tradeline”) that’s at least 6 months old and activity on a tradeline during the previous six months (they don’t need to be the same tradelines).
You may be scoreable by VantageScore as long as your credit report has at least one account in it, even if the account is less than 6 months old.
Additionally, neither credit score agency will score a credit report if the report indicates the consumer is deceased.
The Score Ranges
With all these credit scoring models, a higher score indicates you’re less likely to miss a payment, which is why creditors are willing to offer people with high scores the best rates and terms.
The base FICO® Scores range from 300 to 850, while FICO’s industry-specific scores range from 250 to 900.
The first two versions of the VantageScore ranged from 501 to 990, but the latest VantageScore 3.0 and 4.0 use the same 300-to-850 range as base FICO® scores.
What qualifies as a good score can vary from one creditor to another. However, on the 300-to-850 scale, a score of at least 670 (for FICO®) and 700 (for VantageScore) will generally qualify as having good credit.
The Importance of Different Credit Scoring Factors
The impact of a specific action on your credit scores will depend on your overall credit profile and the scoring model. However, FICO® and VantageScore only consider the information that’s in one of your credit reports when determining a score, and they generally place similar relative levels of importance on the same types of information.
The main factors that impact your score can be separated into several categories:
- Payment history. Whether you’ve made on-time payments, late payments, have accounts in collections, defaulted on debts or declared bankruptcy.
- Credit usage. Your credit utilization rate, or the amount of available credit you’re currently using with your revolving credit accounts, such as credit cards. To a lesser extent, the amount you owe on installment loans is also important.
- Length of credit history. How much experience you have managing credit accounts.
- Types of accounts. Whether you have experience using and paying off different types of credit accounts.
- Recent activity. Whether you’ve recently applied for new accounts that led to hard inquiries.
Within each category, FICO® and VantageScore may take different approaches to how they use or weight specific pieces of information. Three examples are how the scores treat revolving account balances (or credit utilization), collection accounts and hard inquiries.
Your utilization rate can be an important scoring factor, but most scores only consider your most recently reported revolving account balances and limits in this factor, which is essentially your total credit card balances divided by your credit limits on those accounts. This shows how much available credit you’re using.
VantageScore 4.0 looks back and considers your trended utilization, such as whether you usually only make minimum credit card payments or pay your bill in full. FICO® Score and other VantageScore models don’t.
Although unpaid collections accounts can hurt both your FICO® and VantageScore credit scores, collection accounts are treated differently depending on the type of account, whether it’s been repaid and the specific scoring model.
For example, FICO® Score 9 ignores paid collection accounts and puts less importance on unpaid medical collections than other types of unpaid collections. FICO® Score 8 doesn’t differentiate between medical and non-medical collections and doesn’t ignore paid collection accounts. Both versions ignore collection accounts when the original account’s unpaid balance was under $100.
VantageScore 3.0 and 4.0 both ignore paid collection accounts and give less weight to medical collections, but there’s no exemption for low-balance collections.
A hard inquiry gets added to your credit report when you apply for a new credit account, and it can hurt your credit scores (though usually for less than a year). However, scoring model creators understand that applying for multiple loans so you can compare your options and offers is savvy rather than risky behavior.
VantageScore addresses this by deduplicating (or “deduping”) any inquiries that occur within a 14-day window. If you apply for a credit card today, a personal loan tomorrow and five auto loans next week, you may have seven new hard inquiries on your credit report, but VantageScore scores you as if you only had one hard inquiry during that period.
Recent FICO® Scores have a 45-day dedupe window, while older models (including those that are still used for mortgage lending) have a 14-day dedupe window. However, FICO® Scores only dedupe multiple inquiries from student loan, auto loan and mortgage applications.
But FICO® also has a hard-inquiry buffer, which means any mortgage, auto or student loan hard inquiries from the previous 30 days won’t impact your FICO® scores.