17
Mar

shutterstock_125136062

When you apply for a new loan or line of credit, a financial institution will want you to share your credit report, but they want to see it packaged as a credit score. The packages must be specialized: since there are many different types of credit lines like mortgages or credit cards, financial institutions want your credit “packaged” in a corresponding way.

The exact formulas used to compute credit scores are highly complex and are closely guarded industry secrets, but the goal of them all are the same: to predict what doing business with you will be like. Will you pay on time? Keep a balance on your credit card so they can make money off you?

FICO Score

There are 49 different FICO scores sold by Fair Isaac and Co., each targeting a different lending requirement for the various financial servicers in the U.S. All FICO scores range between 350 and 850, with 850 being a perfect credit score. All of the versions of the FICO score use the same base information: that which is contained in your credit files at each of the major credit reporting agencies.

All versions of the FICO score are calculated weighting 5 factors:

  1. Payment history (35% of score),
  2. Credit utilization (30% of score),
  3. Age of accounts (15% of score),
  4. New credit (10% of score),
  5. Types of credit being used (10% of score).

All versions of the FICO model through the most current model, FICO 9, give these credit factors the weights listed above. What is different for each of the credit models is how they calculate each of the credit weight factors.

What version of the FICO score is used depends on what kind of credit you are applying for. If you’re applying for an auto loan, you will get a FICO score calculated specifically to predict how likely you are to repay an auto installment loan. There is a mortgage version of the score and so on.

MyFico.com, the only place a consumer can buy a FICO score, sells two different versions of FICO scores to their customers, the FICO 8 score and the FICO mortgage score. The other scoring models are sold to financial institutions.

Vantage Score

Selling credit-scoring models and scores is big business and the Vantage score was created to compete with the FICO model.   Vantage scores are sold by VantageScore Solutions, LLC, a company which operates as a subsidiary of TransUnion LLC. While FICO claims to service 90% of lenders in the financial services industry, the Vantage score has been making inroads. Vantage Score LLC now claims that 2000 lenders are using its model and 6 of 10 of the major banks in the U.S. use the Vantage Score in one way or the other.

When Vantage Score first came out, it used a different scoring scale than FICO, which led to confusion with consumers who were used to the FICO scale. Originally, the Vantage Score scale was 501 – 990, but in an effort to compete with FICO, Vantage Score 3.0 has been revised to range from 300 to 850.

The weighting factors for the Vantage Score are slightly different from FICO:

  • 32% payment history
  • 23% credit utilization (amount of credit used/divided by credit limit)
  • 5% balances
  • 13% depth of credit
  • 10% recent credit
  • 7% available credit

Some other differences between FICO and the Vantage Score:

  • Unlike the FICO score, paid collections do not count against you (Vantage 3.0 scoring model).
  • With the FICO scoring model, data must be at least a year old to count in the scoring calculation. The Vantage Score can score consumers with only 6 months of data.

If you get your credit score directly from any place other than myfico.com , you will receive a Vantage Score. Despite what Vantage Score LLC proclaims, most lenders still continue to use some variation of the FICO score.

Insurance Score

Your insurance score is made up of information from your credit files and is calculated to predict whether or not a consumer will file an insurance claim. It has been shown statistically that people with high credit scores are less likely to file claims, perhaps because those people with poor credit usually tend have less money, so may be more likely to file a claim on repairs they cannot afford. Your credit score is not used to calculate your insurance score, but the same information may factor into both your insurance and credit scores.

In addition to auto insurance premiums, your insurance score is a big factor when calculating premiums for health and life insurance.   Insurance scores range from 200 to 997. Insurance scores of 770 are considered to be high and scores 500 and lower are considered to be poor. Much of what makes a good credit score also weights insurance scores. Typically, payments on time, low credit utilization rates and a long history all factor into a favorable insurance score.

The use of credit to quote premiums is not legal in all states: Massachusetts, Hawaii and California ban the use of insurance scores. In order to qualify for the lowest insurance rates, you need to have an excellent insurance score.

Lender-Based Scores

Developing a scoring model is expensive, and therefore most lenders outsource this aspect of deciding to whom to lend to by purchasing a scoring model from either Fair Isaac or Vantage Score LLC. After purchasing the “secret sauce”, most lenders take the package they just purchased and then tweak it to fit their own lending criteria. For instance, one lender may put less weight on certain types of late pays than the standard credit-scoring model.

Besides potential variances from credit score model on the basics, lender-based scores often rank you in comparison to other customers in their databases, information that credit bureaus may not have. These models may work more like a grading curve than a general-purpose credit score.  Consumers rarely get a chance to see lender scores; however, if you are declined due to a lender score, they must tell you why and you are then eligible to see your credit report from the three credit bureaus.


Posted in Credit Repair