It's
possible that you have only seen the term FICO used in relation to your
credit score all these years. And now all of a sudden, they're talking
about something called a VantageScore. Like many other consumers though,
it's possible that you are quite unaware at this point of what this
funny new term really means to your credit. If you had to choose one
over the other, which way would you lean in the Vantage score vs FICO choice?
For decades, the three-digit credit score - calculated to the FICO formula - has been what we have grown used to, to
determine what kind of deal we get on a credit card, on a car loan or
anything else. A little while ago, the three major credit bureaus of
Equifax, Experian and Trans Union, all together, decided that they would
create something new - called the VantageScore. It's a new formula,
it's a new number, and this changes everything.
Your
traditional FICO score uses the formula that rates how credit worthy
you are by looking at your bill payment history, the amount of money you
owe people, how long you've had credit, the different kinds of credit
that you have and how often you borrowed over your life. In general,
your bill payment history and the amount of money you owe in all tend to
be the most important things that affect your FICO score.
While
your FICO score can go as low as 100, you don't ever have to go that
low to get the worst credit treatment. Go as low as 620, and you get
branded subprime. You receive the most expensive rates with your credit
card and so on.
The
VantageScore looks at more or less the same kinds of things. But they
weight each criterion differently. Your bill payment history still is
very important. But they don't think that the total amount of debt you
owe people is that important. And they look especially closely at what
percentage of your credit you have used up.
The Vantage score rates you between 501 and 990.
So in the Vantage score vs FICO comparison, which wins out? Which is best for you?
There's
really no reason to pick one over the other. It's just that people over
the decades, have been trained to use the FICO number. With the Vantage
score, the scale changes. And it could cause a good deal of confusion.
Since
the Vantage score starts at 501, the scores they hand people are going
to be higher in general. When someone tells you that he has a 700 credit
score, you might actually be impressed until you learn that he's
actually talking about his Vantage score.
There's
also problem in the way in which the Vantage people just assign a
grading letter to every band of one hundred points. This means that a
person who has scored 701 receives the same a letter grade as someone who's made 799. This can often seem quite unfair.
There
really is no reason to choose one over the other in the Vantage score
vs FICO comparison. It just comes down to what a lender seems to prefer.
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So now that you know have a better understanding of the differences between Vantage Score vs FICO, let's take a look at how you can improve you VantageScore rating.
Poor credit is such a common thing among Americans that the three major credit bureaus have introduced a method for helping consumers to get out of debt. The VantageScore system was introduced in March of 2006 and made available to all merchants who report to the three major credit agencies. Essentially, the point of this new system is to provide a more accurate and consistent credit ranking system for consumers.
In the past, the only credit scoring system was the FICO system, which is calculated on software developed by Fair Isaacs Corporation. The problem with the FICO scoring system was that you could have a very different score from all three bureaus as they each use their own method of calculations.
The new VantageScore system is supposed to create a more uniform method of determining credit risk. It combines new technology and the expertise of industry leaders on credit data to get an easier to understand and more consistent score for use by merchants and consumers alike. The score will be more like academic grading and range from 901-990 for the best credit and 501-600 for the worst.
The best thing about the new scores is that if you have little or no credit history, you can still get a decent score. To improve you VantageScore, always pay your bills on time. The payment history section of your credit report is an important factor in your VantageScore. So be sure that you do not take on more debt than you can handle
Also try to pay more than the minimum balance on credit cards and loan balances. Doing so will keep the principle down and prevent you from maxing out a card or defaulting on a loan. Even five or ten dollars extra per month can make a big difference down the line.
And check your credit report at least once a year for errors. You are eligible for a free report from all three agencies once per every twelve months. You would be surprised at how many errors there can be on your report. So get the facts straight so your VantageScore will be based on accurate information about you and your spending habits.
The next step in our comparison of the Vantage Score vs FICO credit score systems, is to look at how to improve your FICO score.
In the United States, one of the most common discussions amongst its people would be related to credit scoring. Reason behind this is because the score achieved by any consumer would greatly affect the amount of mortgage, loans and many other financial related services.
To put it simply, a credit score is similar to a report card (I know, we have all been through that) where you would get a good nagging for something low and reward for a high score.
Contrary to what many people believe, there is no one universal way of categorizing credit score where the last time you took an extra 5 pennies from the cashier would be recorded on your credit score.
There is however, a widely used well known credit score in the United States, commonly known as FICO or Fair Isaac Corporation. FICO score basically indicates the likelihood of a person to default a loan and this is a commonly adopted tool by most consumers banking and credit industry.
Before going into the discussion on how FICO rating may be improved, it is worth to have a rough idea on what FICE rating is based on.
Basically, FICO rating is separated into a few statistical components where these components are made up from: -
- 35% - punctuality of payment in the past
- 30% - the amount of debt, expressed as the ratio of current revolving debt (credit card balances and others) to total available revolving credit (credit limits)
- 15% - length of credit history
- 10% - types of credit used (installment, revolving or consumer finance)
- 10% - recent search for credit and/or amount of credit obtained recently.
The first step to improving a FICO rating is to get a copy of your own credit report. This can be attained from Equifax and Fair Isaac, TransUnion or Experian.
After that, brace yourself for the agony (or joy if you're an accountant) of going through all the numbers and making sure everything adds up to the best of your knowledge.
Reason is because if something is wrong in the report, it's best to get them corrected because it can take up to months to get a proper correction.
Secondly, if you have serious credit car debt where most of your card balances are close to the credit limit, it's best if you pay them off as soon as possible.
The banks and lenders prefer a large gap between a credit card balance and the credit limit, approximately to a ratio of 40% between balance/limit. Paying off any excess credit card debt would definitely increase the FICO score as it takes up 30% of the FICO score.
Next, it is equally important for you to pay off your debt on time. Despite being able to pay off your debt, it would not go down well in your FICO score if you do not pay your debt on time and every time.
The punctuality of your payment takes up 35% of your score and it is important to know that paying your debt on time now is outweighs the fact that you paid your debt on time 3 years ago.
It is always important to maintain your longest standing account. Reasoning behind this is because the longer you have your financial history established; the easier it is for the creditors or banks to know how reliable your FICO score are.
For example, even if you score a relatively high score, if you credit history is just 5 years as compared to an average rating with a credit history of 30 years, the person with the longer credit history would possibly acquire a larger amount of loan or a lower repayable interest rate.
All in all, it's a not nuclear physics when it comes to raising your FICO score. All it takes is for you to lower your credit card debt, pay your bills on time and keep track of where you are heading in your spending, mortgage and loans. This is not too tough now, is it?
And there you go, a complete education in improving your Vantage and FICO scores and so you'll know what the differences between the Vantage Score vs FICO score are.