FICO vs. VantageScore: 5 Differences You Should Understand

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When you think credit score, you probably think FICO. Since the Fair Isaac Corporation introduced its FICO scoring system in 1989, “What is my FICO score?” has become a common question. FICO scores have burrowed their way into all kinds of lending decisions, most notably mortgages, credit cards, and rentals.

But over the last decade or so, FICO’s market dominance has been challenged by a newcomer called VantageScore. As the result of a collaboration between the three major credit reporting agencies (CRAs)—Experian, Equifax, and TransUnion—VantageScore uses similar scoring methods to FICO but with slightly different results.

So what are the differences, and more importantly, do they really matter to you, the consumer? The short answer: usually no. But you might want to look at different scores for different needs or goals.

In this article, we’ll cover the five main differences between FICO and VantageScore and tell you which one to watch.

1. Difference in Scoring Models

FICO and VantageScore aren’t the only scoring models on the market. Lenders use a multitude of scoring methods to determine your creditworthiness and make financial decisions. But despite the numerous options, FICO and VantageScore are likely the only scores you’ll ever personally see.

How do FICO and VantageScore rate you? Both use the same basic criteria:

  1. Payment history
  2. Length of credit
  3. Types of credit
  4. Credit usage
  5. Recent inquiries

Although both FICO and VantageScore consider much of the same information, they gather their data in different ways.

FICO bases its scoring model on credit reports from millions of consumers at once. They gather these reports from the three major credit bureaus and analyze the reports’ anonymous consumer data to generate an accurate scoring model.

Alternatively, VantageScore uses a combined set of consumer credit files, also obtained from those same three credit bureaus, to come up with a single formula.

Both FICO and VantageScore issue scores ranging from 300 to 850. In the past, VantageScore has used a range of 501 to 990, but the range was adjusted when VantageScore 3.0 was issued in 2013. VantageScore’s numerical rankings now match FICO’s, which makes it easier for consumers and lenders to implement the VantageScore model—plus, it’s less confusing for consumers who check both their FICO score and VantageScore.

2. Variance in Scoring Requirements

If you don’t have a long history of credit, VantageScore is the score you want to monitor. Before it’s able to establish your credit score, FICO requires at least six months of credit history and at least one account reported to a CRA within the last six months. VantageScore only requires one month of history and one account reported within the past two years.

Because VantageScore allows a shorter credit history and a long period for reported accounts, it’s able to issue credit ratings to millions of consumers who wouldn’t qualify for FICO scores. Considering how everyone from employers to landlords want to see your credit score these days, if you’re new to credit or haven’t been using it recently, VantageScore might be able to prove your trustworthiness before FICO has enough data to issue a rating.

3. Significance of Late Payments

A history of late payments will impact both your FICO score and your VantageScore. Both models consider these factors:

  1. How recently the last late payment occurred
  2. How many of your accounts have had late payments
  3. How many payments you’ve missed on an account

However, while FICO treats all late payments the same, VantageScore judges them differently—it penalizes late mortgage payments more harshly than other types of credit.

If you’ve had late payments on your credit cards, they will have about the same impact on both your FICO and your VantageScore. But if you’ve had late payments on your mortgage, you might find you have a higher FICO score than VantageScore.

4. Impact of Credit Inquiries

You’ve probably heard you shouldn’t open too many credit cards in a short period of time. One reason for this is every time you apply for a credit card, the lender does a “hard inquiry” to check your creditworthiness.

VantageScore and FICO both penalize consumers who have multiple hard inquiries in a short period of time, and they both do “deduplication.” Deduplication is important for things like auto loans, where your application may be sent to multiple lenders, thereby resulting in multiple inquiries. Both FICO and VantageScore don’t count each of these inquiries separately—they deduplicate them, or consider them one inquiry.  However, the timespan they use for deduplication differs.

FICO uses a 45-day span to deduplicate your credit inquiries. VantageScore limits its focus to only a 14-day range. VantageScore also looks at multiple hard inquiries for all types of credit, including credit cards. FICO considers only mortgages, auto loans, and student loans.

Inquiries aren’t your biggest concern when it comes to your credit score, but they do have an impact. If you want to buy a house or a car, restrict hard inquiries as much as possible to avoid lowering your credit score.

5. Influence of Low-Balance Collections

VantageScore and FICO both have penalties for accounts sent to collection agencies. However, FICO might give you a bit more of a break when it comes to low-amount collection accounts.

FICO ignores all collections where the original balance was under $100. It also doesn’t count collection accounts you’ve paid off. VantageScore, on the other hand, ignores only paid collection accounts, regardless of the original balance amount.

Keep Your Credit High

Regardless of the differences between FICO and VantageScore, the essential advice for keeping your credit score high remains the same:

  • Avoid late payments. Pay your bills, and pay them on time.
  • Keep your credit balances low. Don’t max out your credit cards, and try to keep your cumulative balance to less than 30%—the lower the better.
  • Apply for new credit only when you have to. Don’t open a bunch of new cards in a short period of time, and don’t close old accounts without good reason.

Check Your VantageScore Monthly

You can get a free VantageScore 3.0 credit score, updated monthly, from Credit.com. You can also see how your score compares to others and get a custom action plan for your credit. Remember, every point counts when it comes to getting the best interest rates and lending terms.

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The post FICO vs. VantageScore: 5 Differences You Should Understand appeared first on Credit.com.

The New FICO Score: What It Means for You

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If you’ve always maintained a strong payment history with your cellphone and cable bills and want a little credit for it, you may be in luck. Credit-scoring giant FICO just announced a new scoring model designed to give credit scores based on people’s payment history with their phone, utilities and other bills.

LexisNexis Risk Solutions and Equifax introduced the FICO Score XD to help lenders assess consumers who may not have a traditional credit history but have a strong record of paying non-credit accounts — things that are not in traditional credit scores. In the credit reporting and scoring industry, these people are called “credit invisibles,” and alternative credit scores like the FICO Score XD aim to make them visible to potential lenders.

For consumers who may be struggling to successfully achieve financing for a car, a house or personal loan, because of their lack of traditional credit history, FICO Score XD uses alternative data to determine if they are creditworthy. This data tool evaluates phone, cable, utility payments and public records to generate scores on the same 300 to 850 scale used for standard FICO scores. (You can see what’s considered a good credit score on that scale here.) The alternative payment history on cable, cellphones and utilities is sourced from National Consumer Telecom & Utilities Exchange.

“Alternative data is a critical component and really a driver of financial inclusion,” said Ankush Tewari, senior director, Credit Risk Decisioning at LexisNexis Risk Solutions. “Banks and other lenders are able to expand their addressable market and grow their businesses by leveraging scores that are built on models utilizing alternative data.”

FICO isn’t the only one experimenting with alternative credit scores, and it remains unclear how many lenders will actually use FICO Score XD when evaluating credit applicants. There are dozens of companies with their own credit-scoring formulas, and these companies often have more than one scoring model (FICO alone has more than 50 FICO credit score formulas). That can make it difficult for consumers to understand their credit scores, because every score is different.

The good news is there are many ways to see your credit scores for free — you can get two free credit scores every month on Credit.com — but it’s important you don’t compare different scores to each other. The scales may be different (the FICO Score XD, for example, ranges from 300 to 850, but not all scores do), and the data and math driving the scores may be different, too. By tracking a specific credit score over time, you’ll see how your financial behaviors like payment history affect your credit.

If you don’t want to rely on the possibility of a lender using an alternative credit score in order to get credit, you may want to consider trying to establish credit with a secured credit card or a credit-builder loan.

Staying on top of your bills and keeping your finances under control are imperative to financial empowerment. You can view your credit score free of charge before applying for credit, an advisable measure. And be sure you know the basics when it comes to how your credit score is calculated.

More on Credit Reports & Credit Scores:

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5 Little-Known Ways Your Partner Can Ruin Your Credit

5 Little-Known Ways Your Partner Can Ruin Your Credit

Planning to move in with your significant other or tie the knot in the near future? There are many exciting discussions to be had, but money matters may not be one of them. In fact, it’s the dreaded topic many couples prefer to stay away from. But doing so can have serious implications for your finances and your credit.

Let’s take a closer look at how your significant other can send your credit to the trenches:

Careless Money Management

In some households, there is an appointed financial manager and the other relies on him or her to handle business. Unfortunately, they may not exercise sound financial management habits, leaving you to pick up the pieces and repair your credit after the damage is done.

Minimal Credit History

Kudos to your partner for avoiding debt, but it can become an issue when you’re ready to open a joint account, activate utilities or make a major purchase. Reasoning: minimal credit history equates to elevated risk in the eyes of lenders and increases interest rates and deposits or even worse, disqualification.

Excessive Spending

No cash on hand? No problem. Paying with a credit card will do the trick.

If this your partner’s mentality, beware of the damage that can be done to your credit score if it’s a joint credit card and the spending gets out of control. Not only will your credit utilization ratio take a hit, but you could fall behind on payments if the minimum payment becomes too much to handle. (Another thought: only paying the minimum will quickly land you in a mountain of debt).

Impulse Purchases

This goes hand in hand with the last point. Whipping out the plastic each time you see a “must have” item is a recipe for disaster, especially if it’s a joint account and your partner is unaware of your actions.

Untimely Purchases

Late payment fees aren’t the only thing you have to worry about when you miss due dates. Your credit score could also take a hit if the delinquency spans beyond 30 days and the creditor or service provider reports the delinquency to the credit bureaus. So if you share any accounts and the party responsible for remitting payment drops the ball, down goes your credit score.

A Suggestion

Before taking the next step in your relationship, share money perspectives and credit reports with one another. Schedule an hour or so of your day for a meeting and cover the following:

  • Who will pay the bills
  • Debt-management practices
  • Joint checking and savings accounts, and if they will help thwart irresponsible spending habits
  • How to improve your credit score. (Visit AnnualCreditReport.com to retrieve a free copy of your credit report. Also, take a look at this article to learn more about the types of credit scoring models).

If there are major discrepancies and credit issues, devise a realistic plan of action to get over the hump. This may be painful, but will mitigate the problem before it gets out of hand and costs you your relationship. 

The post 5 Little-Known Ways Your Partner Can Ruin Your Credit appeared first on ReadyForZero Blog.

6 Lies About Credit Cards You Actually Believe

6 Lies About Credit Cards You Actually Believe

When it comes to credit cards, I’ve heard it all. There are so many myths floating around about the magic plastic that you may be tempted to avoid them altogether. Even worse, a lack of knowledge could lead to irresponsible use that could haunt you for years. Unfortunately, I was a part of the latter group and it ended up costing me a ton of cash to get out of the hole.

But you don’t have to fall into the same trap that I did. Here are some credit card myths you should be aware of:

1. Credit card applications are bad for my credit score.

Whether you’re seeking a temporary money fix or looking to take advantage of an irresistible introductory offer, chances are you’ve been warned to proceed with caution when applying for credit cards. And rightfully so; obtaining too many credit cards at once can be a disaster waiting to happen if the cards are not used responsibly or if you’re a credit newbie with limited credit history. Plus, new credit accounts account for ten percent of the unique FICO algorithm used to calculate your credit score. 

By contrast, having a stellar credit profile will minimize the damage done to your FICO score. Hard inquiries resulting from credit card applications do have a negative impact on your score, but it is very minimal as the decline will likely only be a few points.

2. It’s okay to exceed the credit limit.

Debt-utilization ratio, anyone?

While your credit card issuer may not assess an over-the-limit fee, that doesn’t necessarily mean it’s OK to continue swiping away even if you’re over the limit. In fact, maintaining a balance that exceeds your credit limit may hurt your credit since the amounts owed account for 30 percent of your FICO score. You could also find yourself with a higher APR for failing to exercise sound debt-management habits.

3. Not carrying a balance is detrimental to my credit health. 

To boost your credit score, it is necessary to show lenders you can responsibly manage your debt over time. However, it is not necessary to carry a balance each month. A smarter alternative: once the statement is released, pay the balance in full prior to the end of the grace period. That way, your credit utilization will remain low, you won’t pay interest, and the activity will report to the credit bureaus.

4. All I have to do is make the minimum payment to remain in good standing.

While making the minimum payment by the due date each month will reflect positively on the payment history portion of your credit report, your wallet will take a hit. To illustrate, the minimum payment on Bank of America credit cards only covers 1% of your balance, with the remainder allocated to interest and late fees (if applicable). The higher the balance, the longer it will take to eliminate the outstanding balance.

5. Credit cards come with a 30-day grace period before interest accrues.

If you think all cards come with a 30-day grace period until interest is assessed to your credit card balance, think again. You may be fortunate to have a card that gives you this lengthy time span to eliminate the balance before interest is applied, but some grace periods are 20 days or less.

6. Closing idle accounts will boost my credit score.

“By closing an old or unused card, you are essentially wiping away some of your available credit and there by increasing your credit utilization ratio,” says myFICO. Therefore, it’s best to keep idle accounts open for the sake of this ratio, which significantly impacts your credit score. Also, remember that closing a credit card won’t make it go away. 

Have you been tricked into believing any of these lies about credit cards? Please share your experiences in the comments below.

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