Determining what your credit score actually is can be a frustrating and complicated task. That’s because there are different credit scores and different ways your given score is determined. Add three credit reporting agencies, and you may feel like you will never figure it out. If you take a closer look, however, it does start to become clear.
What You Need to Know About Different Credit Scores
Maybe the most important thing to understand is that there are two major companies that the credit rating agencies use to help determine your credit score. These are Fair Isaac Corporation (FICO) and VantageScore. VantageScore has been a player in the market for about fifteen years. Before that, FICO was the only player in the game.
While most lenders still use FICO scores to determine whether or not to lend you money, if you order your own credit score, chances are you will receive a VantageScore.
This is where the issues start because FICO and VantageScore don’t use the same data to determine your credit score.
The Differences Between FICO and VantageScore
There are five differences you need to understand if you want to make sense of your credit scores.
1.) They use different models – VantageScore uses a model that combines the credit information from all three credit reporting agencies and then develops that into one formula that is sent to all three agencies. FICO, on the other hand, uses millions of anonymous consumer reports that are acquired separately from the credit reporting agencies. Then they create a model for each agency.
2.) What is needed to create a score – If you have never had any credit or anything in your name such as a utility bill, then you won’t have any credit history. This is important because the bare minimum requirements are vastly different between the two companies. With FICO you need a minimum of six months of credit history with one account being reported to the agency within the past six months to obtain credit, but with VantageScore, you only need one month of credit history with an account being reported within the past two years.
3.) Late payments are looked at differently – All late payments are frowned upon and won’t help your credit, but it is important to know that VantageScore will give you a larger penalty for a late mortgage payment than for other types of late payments. With FICO, all late payments are treated equally. This can mean you end up with different credit scores.
4.) Inquiries are scored differently – If you have a lender make an inquiry to determine whether or not they will lend you money, this does give your credit score a little ding. That’s true for both VantageScore and FICO. The difference comes in when you have more than one inquiry for the same loan such as a car loan. FICO will ignore all duplicate inquiries for a 45 day period. VantageScore, however, will only ignore duplicate inquiries for 14 days. That means if you have a new lender pull a credit report on day 15 it will be an additional ding on your credit score.
5.) Low-balance collections count differently – If you have an account with a low balance, say under $100 and it went into collections and then you paid it, FICO will ignore it when determining your score. If it is over $100 they won’t. VantageScore will ignore all paid collections regardless of amount.
What is most important to understand is that you don’t have just one credit score. Between FICO and VantageScore, the three credit reporting agencies, and lenders own custom scores, you have many different credit scores.
What will serve you best is to take the three scores you receive from the credit agencies and average them. Then check your reports for any errors and have them removed. This will give you the best idea of your approximate credit score and help make the whole topic a little easier to handle.
Having good credit is pretty simple actually. Pay your bills on time. Keep your level of debt compared to your available credit under 30 percent, have a mixture of debt types and keep an eye on your different credit scores understanding their limitations. If you do that, you shouldn’t have anything to worry about.
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