Lenders have two primary options to look at when evaluating your credit because everything comes down to a score. Most creditors will use your FICO score to decide whether you are creditworthy. People usually think of their FICO score when they think of a credit report. The company was the first in the field, but a growing number of lenders are now using VantageScore. Here are the differences between the two and how they impact you.
Similar Credit Scoring Criteria but Different Ways to Get There
Let’s start with the common elements between these two types of credit scores. Both are measuring your creditworthiness and the possibility that you might default on a loan within the next two years. In general, they are both looking at the same types of criteria to compute your score. However, they use different ways to get there.
The Two Models Use Different Weights
One of the major differences between FICO and VantageScore is the weight that each gives to the different elements of your credit score. For example, VantageScore weighs payment history and age of credit more heavily than FICO, although a more recent model of VantageScore cuts the importance of payment history. On the other hand, FICO’s weightings count the amount of credit that you have outstanding much more heavily. In addition, FICO also counts new credit and credit inquiries much more than VantageScore.
In the end, the two models may reach roughly the same scores and conclusions based on the individual factors, albeit with minor differences. It is doubtful that you would qualify for credit based on FICO but not based on VantageScore or vice versa. They largely would reach the same conclusions about you as a possible borrower.
Duration of Credit History
The FICO model clearly favors borrowers with longer credit histories. Some consumers may not even be able to receive a FICO score. The requirements are that you need to have at least one credit account that was open for at least six months and one account that reported information to the three credit bureaus within the last six months. If you do not have those, FICO cannot assign you a score.
VantageScore allows more people to receive credit scores. All you need to have is one account for one month and one account reporting data within the past two years to receive a score. If you are trying to build credit being new to everything, FICO will make it harder for you to get started. Every borrower needs to start somewhere.
The two services treat credit inquiries differently. For both, a hard inquiry on your credit will affect your score because it is a sign that you are considering adding to your debt level. When you are shopping around for a loan, you may compare different products, but lenders may not quote you an exact rate unless they know your credit history. Thus, multiple lenders may make inquiries.
FICO gives you more time to shop around. If you have multiple inquiries of the same type within a 45-day period, they only count as one credit pull. VantageScore only gives you 14 days to shop around for credit. If the inquiries are more than two weeks apart, each will count against you.
Credit Snapshots Versus History
The FICO report looks primarily at data that is reported to credit bureaus at the time that the score is calculated. This allows for borrowers to get more credit with more recent favorable trends in their score, but it also means they could be punished for unfavorable trends.
VantageScore will reflect patterns, but they will be over a broader period of time. VantageScore analyzes data and trends over 24 months as opposed to just the more recently reported data. VantageScore may make it harder for consumers to recover more quickly from a bad credit history or a missed payment in the past.
Whether Small Collections Harm Your Credit
Many consumers have small accounts referred to collections. Some creditors will send an account to collections even over unpaid bills as low as $10-20. FICO is much more forgiving when it comes to these small outstanding accounts. FICO will ignore derogatory information of the account if the outstanding amount is below $100.
VantageScore looks at everything. Even very small amounts will work against you. Given that VantageScore considers trends over two years of time, even a small unpaid bill in your past can have an impact on your credit score.
On the other hand, VantageScore is a little more charitable when it comes to paid collection accounts. It will ignore these accounts after they have been paid. FICO may or may not ignore these accounts. It depends on the particular FICO version that creditors are using. Many consumers would consider it harsh that an unpaid account for a little amount of money could work against them.
In terms of what this all means for you, keep doing what you are doing when it comes to building up your credit history and score. If you adopt healthy habits and try to cut your debt levels while establishing payment history, you should be viewed as creditworthy no matter what scoring model a creditor uses to judge you. Consumers do not have control over which model a creditor uses, but they do have control over their own borrowing habits.
You can check both your credit scores from TransUnion and VantageScore with our Pocket360 online account management tool. Consider signing up today with P360 for a more streamlined approach to loan management.