Credit scores play an important role in our lives. Whenever you apply for things like a credit card or a mortgage, a credit score will be part of the decision making process. Many people might think of a credit score as a single number, but there are actually two main credit scoring companies in the US that provide their own credit scores. These numbers are usually a little different from each other. The older of the two companies is FICO while the newer of the two is VantageScore.
What’s a credit score?
The idea behind a credit score is that a person’s likelihood of repaying a loan can be reasonably and consistently calculated and represented as a number. This helps provide a singular value that can be easily compared. Lenders utilize credit scores to better help inform their decision making process when it comes to approving or denying a loan which in turn helps them manage risk. Furthermore, the credit score can also provide a level of likelihood so that lenders can fine tune their rates and terms for each applicant on a case by case basis.
Essentially, a credit score can represent how trustworthy a person is when it comes to borrowing money. The higher your credit score, the more likely you’ll be able to pay back a loan and the more lenders will trust you.
The way a credit score is calculated happens to be proprietary information that companies do not make public. There’s a lot of research that goes into designing these formulas and companies want to protect their work along with the time and money they’ve spent on it. However, we do know that the data that is used to calculate a credit score comes from historical credit records from consumer credit bereaus.
There’s a reason why so many companies use credit scores and that is because they help save a lot of time and effort. Before credit scores came along, lenders had to hire departments full of people to carefully scutinize the credit history of each and every applicant and determine whether or not the applicant was trustworthy enough to lend money to. This process was long, expensive, and open to bias.
What’s the difference between FICO and VantageScore?
FICO and VantageScore are both companies that provide credit scores that aid lenders for many purposes including general loans, credit cards, morgages, etc.
FICO, which stands for Fair Isaac Corporation, is the older of the two having providing credit scores since 1958. Due to its history, it provides the majority of the credit scores in the US.
VantageScore, on the other hand, is a relatively newer company that was created by a joint venture between the three major US consumer credit bereaus in 2006 to compete against FICO. These three consumer credit beareaus are Equifax, Experian, and TransUnion.
As with many industries, this competition is good for both consumers and businesses as both credit scoring companies work to ever improve their formulas so that their credit scores are as accurate as possible.
One major similarity is that both FICO and VantageScore adopt a scale of 300 – 850 with a higher score being a better score.
On the other hand, one of the largest differences between the two scoring systems is that FICO (as of the latest version 9) focuses on the most current billing cycle to calculate their score while VantageScore (as of the latest version 4.0) uses what they call “trended data” and looks like your credit utilization rates over time. The idea is that looking at data over time presents a more accurate depiction.
Why would one choose one over the other?
The choice of credit score to use is not something consumers would have. Instead, it is the banks and lenders that choose which one to use when screening applicants. These lenders have the incentive to utilize the most accurate information they can find so that they can make more efficient and better decisions when loaning out money which may help their bottom line. If one credit score is more accurate in predicting the credit trustworthyness of an applicant, lenders will choose to use that one. With the volume of money these lenders are dealing with, even slight differences can make a big impact so they may choose one of the other depending on the situation at hand.
Ultimately, the source data used for both credit scoring systems are the same so any differences will be minor enough that shouldn’t cause concern among consumers and applicants. If you’re curious, you can always ask the bank or lender which scoring system they use and most will provide this information to you.
Periodically checking your credit score is a great way to monitor the progress of your credit history and how lenders will view you.
If your credit score is steadily improving, you can be more confident when applying for credit cards and loans.
Alternatively, if you see a drop in your score, that is a probably a good time to investigate what the problem is before it affects you. One way to investigate is to request your credit history from the consumer credit bereaus and checking to see if there are any new credit cards opened without your knowledge or perhaps any missed payments. Per federal law, everyone is entited to one free copy of their credit report every 12 months for each of the three consumer credit bureaus. These free copies can be attained through annualcreditreport.com.