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Beyond your weight and age, the number that probably causes you a lot of stress is your credit score. Those three digits can either make or break your dreams for obtaining a house, car or a credit card you can be proud to carry. While you're probably looking to get the best score possible, it can be disheartening to hear that you don't have just one score assigned to your credit—you may have dozens.
There's no need to panic about every credit score assigned to your name. Following good personal finance habits—making timely payments, not carrying too much debt and having an established credit history—will help you achieve a great credit score no matter which score creditors are using. But it's worth exploring where these numbers come from, why the different models were created, and how they're used to gain a better sense of control over your financial future.
What's a Credit Score?
In 1989, the Fair Isaac Corporation (FICO) started offering general credit scores for consumers based on available credit reports, giving birth to the FICO score that's now well-known. The purpose of the FICO score is to provide lenders the answer to a simple question: Will this consumer pay back a loan? The higher the score, the more certain the lender can be that you'll pay off the loan.
The FICO score quickly established itself as the dominant credit scoring model without any significant rivals until 2006. At that point, the three main credit bureaus—Equifax, Experian and TransUnion—banded together to create their own credit scoring method called VantageScore. Most lenders still use some variation of the FICO score model (90 percent, according to FICO), but VantageScore has been adopted by a growing number of financial institutions looking to gain insight on consumers left out of the FICO scoring model.
What's the Difference?
Since most lenders use either the FICO score or VantageScore, it pays (literally) to know where you stand with both scoring methods.
The FICO score is calculated by weighing certain parts of your credit history more than others, as you can see from the graph below.
VantageScore determines your credit score in a similar fashion, with the breakdown of one of its more recent models shown below.
You can see that the basics of good credit—like making payments on time and keeping low balances—are the same for both FICO and VantageScore. One model isn't suddenly going to reward you for running up a credit card debt and defaulting on your mortgage.
The main difference between the two is how much data they need on an individual before generating a credit score. FICO, for instance, requires a consumer to have an active credit history for at least six months. VantageScore only requires that a credit account is active for one month within the last two years. The bottom line is that you are far more likely to have a VantageScore because it casts a much wider net, which is why the company claims it can generate credit reports for as many as 35 million people unable to get FICO scores.
Here are a few more differences between FICO and VantageScore you'll want to note.
-Late Mortgage Payments: Currently, VantageScore penalizes you more for making a late mortgage payment than other types of late payments, whereas FICO treats all late payments the same.
-Hard Credit Inquiries: Both models lower your credit rating a little when they see that a lender, such as a credit card issuer or a mortgage loan officer, has pulled your credit history for an inquiry. That's because people who open new lines of credit are more likely to have trouble making payments. This type of credit check is known as a "hard inquiry" (as opposed to you looking up your own credit score, which is a "soft" inquiry and carries no penalty).
Multiple hard inquiries in a short amount of time often happen when a consumer is shopping for a competitive mortgage loan, for instance, but both FICO and VantageScore count these multiple inquiries as a single penalty. FICO groups inquiries made over a 45-day span into one inquiry, while VantageScore only groups inquiries made over 14 days.
-Paid Collections: Depending on which version of the FICO score the lender is checking (more on that in a bit), debts sent to a collection agency will be ignored so long as they have been paid off in full. FICO will also ignore collection accounts where the original debt was $100 or less. VantageScore also currently ignores paid collection accounts, but collection accounts with balances of $100 or less may still negatively impact your score.
A Score for Every Industry
It may seem complicated enough trying to keep track of both your FICO and your VantageScore, but the rabbit hole of credit scores goes deeper still. FICO also creates industry-specific credit score models used by lenders in those industries to help them decide whether to give you a car loan, mortgage loan or a credit card. This means you most likely have a FICO auto score, FICO credit card score and more, in addition to your base FICO score. "The generic FICO score is calculated, and then a scorecard overlay is utilized to 'adjust' that score based on the risk posed by the consumer for any one of the above listed loan/credit types," says John Ulzheimer, an independent expert on credit with previous experience working at FICO and Equifax. "The adjusted scores are normally 20 to 25 points from the generic score."
That's not a huge deviation from the base FICO score, but it does reflect whether your credit history is stronger or weaker regarding particular industries. For example, if you've had some trouble making car payments in the past, but your stellar credit card history helps give you an overall excellent FICO score, don't be surprised if your FICO auto score is a bit lower than the base score.
Same Model, Different Versions
Besides the industry-specific scores, both FICO and VantageScore periodically update their main models to provide lenders with a more accurate picture of a borrower's reliability. FICO is currently on FICO score 9, while VantageScore's latest model is VantageScore 4.0.
But lenders can use any version of these scores. Although FICO score 9 is the company's latest model, most lenders (according to FICO) still use FICO score 8—and some may use even older iterations.
The differences between versions of the same scoring model won't turn your excellent credit into a terrible score (or vice-versa) but it can have a moderate impact. For example, FICO score 9 doesn't penalize consumers as harshly for uncollected medical debt as FICO score 8 does, and VantageScore 4.0 attempts to account for an individual's credit history over the past 24 months, rather than just take a "snapshot" of the consumer's current credit status.
In addition, because FICO collects its data from each individual credit reporting bureau, it generates three separate credit scores unique to each bureau. Because the data from each credit reporting bureau should be mostly identical, these three scores won't deviate too much from each other. If they do—for example, if your FICO score at Equifax is 700 while at Experian it's 400—there's probably an error in the data somewhere, and you'll need to get to the bottom of it. VantageScore, because it's a collaboration between the credit reporting bureaus, generates a single score used at all three.
Stick to the Fundamentals
Now that your head is whirling from all the knowledge about the multitude of credit scores attached to your name, you naturally want to know how to make sure each of those scores remains as strong as possible. The good news is that you already know what you need to do—make your payments on time, don't take on more debt than you have to and maintain as long a credit history as you can. Your credit score may vary slightly between different versions, but it's unlikely to make the difference between getting that cash-back credit card or not. Stick to the good financial habits to which you've always adhered, and you should be rewarded with a good score no matter what model the lender uses.
The article, How Many Credit Scores Do You Have?, originally appeared on ValuePenguin.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
