Credit score is a very important factor for lenders in the United States. Your credit score is always considered by credit card companies and banks. It is the deciding factor for lenders. High-risk borrowers with low credit scores are usually avoided. It is also necessary to check your own credit score before applying for a loan or credit card. Credit scores are almost always based on your credit history. However, the credit model used in deriving your credit score is just as important.
Three major credit card companies have invented VantageScore model in order to provide FICO with a rival. The three companies are Equifax, TransUnion, and Experian. This model was disclosed on 14th March 2006. Although FICO is still very widely used in the United States, VantageScore is being considered by lenders (banks and credit card companies) and has grown in importance ever since its conception in 2006. Below are the differences and similarities between VantageScore and FICO models.
VantageScore and FICO – A comparison
Consumers can get a hand on their FICO scores for Experian, Equifax and Trans Union on the myFICO website. VantageScore is available on the website of TransUnion and Experian. You can also get your VantageScore on free credit websites for a cost. The TransUnion, Equifax, and Experian use the same method to derive the VantageScore for an individual. However, the credit report that the three companies have for a particular individual often varies. Hence, VantageScores derived from the three companies normally differ to some extent. However, it is well known that FICO had no involvement in the creation of VantageScore.
FICO derives credit reports from three CRAs. It creates a different model based on the data from each of the CRAs. VantageScore combines data from all three CRAs to form a single formula. In both models, however, a higher score indicates lesser risk.
FICO requires at least six months of credit history with at least one account reported in the past six months. VantageScore requires only one month of credit history with one account reported in the past two years. FICO also treats all late account payments as equally bad. However, VantageScore gets lowered for late mortgage payments more than anything else.
Needless to say that two scores based on two different models cannot be compared.
VantageScore and its calculation
‘Subprime’ category is for borrowers who are ones with an ambiguous credit history. Borrowers with such a credit history give lenders a hard time making a decision. VantageScore seeks to help such lenders like banks and credit card companies with a credit score that analyzes credit history of such borrowers in a much detailed fashion. The older versions of VantageScore models range from 501 to 990. Depending on which range the score falls in, borrowers were divided into 5 groups: A (900-990), B (800-899), C (700-799), D (600-699), and F (500-599). The latest version of VantageScore ranges from 300-850 from the year 2013.
The exact formula for VantageScore is unavailable. However, the creators of VantageScore have revealed the categories into which a credit report is divided and the different weightages on each of the categories. However, the aspects that have positive or negative effects on VantageScore are not known to us. The score is nothing but a statistical estimate of whether the borrower will pay his debts in time or not. Obviously a history of bad credit is sure to lower the credit score based on this model.
VantageScore is a combined score derived from several categories. These categories along with their definitions and weightages have been listed below:
- History of Payment: A weightage of 40% is riding on this category. This category focuses on whether you have paid your debts in time or not. A history of not paying debts in time results in a lower score. A history of consistent and timely payment of debts can increase VantageScore significantly.
- Credit Depth: This category focuses on the ratio of debt-to-credit. It also takes into account the credit that is remaining or available. This category has a weightage of 21%.
- Utilization: This category is based on the total debt that you have in your credit history. While current debt may lower scores, delinquent debt can be very harmful to credit scores calculated via VantageScore model. 20% weightage is given to this category.
- Balances: The period of credit history and the kinds of credit received in the past are the areas of concern in this category. A weightage of 11% applies on this category.
- Recent credit: The number of new credit account the borrower has it also affects his VantageScore. A weightage of 5% is put on this category.
- Available credit: The amount of credit that can be availed at a point of time is also considered for VantageScore. The weightage is 3% on this category.
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