A credit score of 700 or more is typically regarded as favorable for a score that ranges from 300 to 850. Excellent is defined as a score of 800 or above on the same scale. The majority of people have credit scores between 600 to 750. The average FICO Score in the United States in 2020 was 710, up to seven points from the year before. Creditors may be more confident in your ability to repay future obligations if you have a higher credit score. However, when examining customers for loans and credit cards, creditors may have their own definitions of what constitutes good or poor credit.
This is partly determined by the sorts of borrowers they want. Creditors may also change their criteria based on how current events may affect clients’ credit ratings. Although some lenders construct their own proprietary credit scoring tools, FICO and VantageScore are the most widely utilized credit scoring models.
The FICO Score Rating
FICO is a more established firm that was the first to develop credit scoring models based on credit reports. It generates separate versions of its scoring models for use with data from each credit bureau, albeit the latest versions, such as FICO Score 8, have a common name.
Consumer FICO Scores may be classified into two categories:
- Base FICO Scores: These scores are designed to estimate the possibility of a customer defaulting on any form of credit commitment, and they may be used by any type of lender. FICO credit scores start at 300 and go up to 850.
- Industry-specific FICO Ratings: FICO provides auto and bankcard scores that are tailored to the needs of auto lenders and card issuers. Industry ratings vary from 250 to 900 and estimate whether or not a customer will default on a certain kind of account.
FICO industry-specific scores are based on an essential FICO Score, and new scores are released regularly. Early in 2020, for example, the FICO Score 10 Suite was released. There’s a FICO Score 10 essential score, a FICO Score 10 T (which adds trended data), and new industry-specific ratings.
Scores are also employed on a less frequent basis. FICO, for example, is gradually introducing the UltraFICO Score, which enables customers to connect their checking, savings, and money market accounts and takes banking behavior into consideration. Lenders may also construct specialized credit scoring models that are tailored to their specific target clients.
What Makes a FICO Score Good?
Consumer credit ratings are created by FICO in a variety of ways. FICO Scores are available in “base” and industry-specific versions for credit card issuers and auto lenders.
FICO Scores start at 300 and go up to 850, with 670 to 739 being considered “excellent” by FICO. The range of FICO industry-specific credit ratings is 250 to 900. On the other hand, the intermediate categories are divided into the same groups, and a “good” industry-specific FICO Score is still between 670 and 739.
Factors that Influence Your FICO Score
Although the precise percentage split used to establish your credit score will depend on your particular credit report, FICO utilizes percentages to reflect the broad importance of each area. The following is the order in which FICO scores factors:
- 35 percent payment history
- Unpaid debts: 30%
- About 15 percent of people have a credit history.
- A 10% credit mix
- 10% for new credit
The VantageScore Rating
VantageScore, on the other hand, offers a tri-bureau scoring model, which means it can analyze your credit report from any of the three leading consumer credit agencies using the same methodology (Experian, TransUnion, and Equifax). In 2006, the first version was released (VantageScore 1.0). VantageScore 4.0, the most recent version, was issued in 2017 based on data collected between 2014 and 2016. It was the first credit score to include trended data or how people manage their accounts over time.
Why VantageScore Ratings are Ideal?
The first two VantageScore credit rating algorithms have scores ranging from 501 to 990. The 300 to 850 range is used by the two newest VantageScore credit scores (VantageScore 3.0 and 4.0), which is the same as the foundation FICO Scores. VantageScore considers the 661 to 780 range to be a respectable range for the most recent models.
Factors that affect VantageScore
VantageScore ranks the criteria in terms of how important they are in generating a credit score. Still, your credit report will play a role as well. The following is the order in which VantageScore examines factors:
- Credit use, balance, and available credit: All of these factors are pretty important.
- Credit mix and experience: a powerful combination
- Payment history: Influential in a moderate way
- Credit history’s age: It has less impact.
- Accounts that have been opened for the first time are less powerful.
What Causes Credit Score Variation?
Lenders use credit ratings to make loan choices. FICO and VantageScore both develop credit scoring models for lenders. Both firms regularly release new versions of their credit scoring models, similar to how other software companies release new operating systems. The most current versions may take into account technical advancements or changes in customer behavior and better conform with contemporary regulatory standards.
Lenders have the option of using either model. In fact, some lenders may choose to continue with outdated versions due to the potential expenditure required to upgrade. Many mortgage lenders also utilize earlier versions of the underlying FICO Scores to comply with Fannie Mae and Freddie Mac rules.
You’ll also seldom know which credit report and score a lender will use until after you’ve submitted an application. The good news is that all consumer FICO and VantageScore credit scores are based on the same underlying information, which is data from one of your credit reports. They all seek to make the exact prediction: the chance of a person being 90 days past due on a bill (generally or for a particular sort) during the following 24 months.
As a consequence, your credit scores may be influenced by the same things. If you keep track of numerous credit scores, you can notice that your results change based on the scoring model and which of your credit reports it examines. However, you may see that they all increase and fall at the same period throughout time.
Factors that FICO and VantageScore Credit Ratings Consider
All of your credit ratings are affected by the same criteria, which are usually divided into five groups:
- Payment history:
Making timely payments on your credit accounts will help you improve your credit ratings. However, failing to make payments, having an account sent to collections, or declaring bankruptcy may all lower your credit score.
- Credit usage:
This factor includes the number of accounts with balances, the amount you owe, and the percentage of your credit limit that you use on revolving accounts.
- Credit history length:
This category contains the average age of all your credit accounts as well as the oldest and newest accounts.
- Account categories:
This is also known as “credit mix,” and it refers to whether you’re managing both installment and revolving accounts (for example, a car loan, personal loan, or mortgage) (such as credit cards and other types of credit lines). It usually boosts your grades if you can demonstrate that you can safely handle both kinds of accounts.
- Recent activity:
This factor considers if you’ve applied for or created new accounts lately.
In discussing the relative relevance of the categories, FICO and VantageScore employ different techniques.
Factors that FICO and VantageScore Credit Scores Overlook.
When computing credit ratings, FICO and VantageScore exclude the following information:
- Your race, color, religion, ethnicity, national origin, gender, or marital status. (These facts, as well as any receipt of public assistance or the exercise of any consumer right under the Consumer Credit Protection Act, are not taken into account by credit scoring systems in the United States.)
- The age of the individual.
- Your salary, job title, employer, start date, and work history. (However, keep in mind that lenders may consider this information when making final approval decisions.)
- Your current address.
- Inquiries that are not formal. Others, such as organizations making promotional credit offers or your lender regularly reviewing your current credit accounts, frequently launch soft inquiries. Soft queries occur when you check your own credit report or utilize credit monitoring services from organizations like Experian. Your credit score is unaffected by these queries.