Understanding The Differences Between FICO® And VantageScore®
*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
When it comes to your financial life, we have a lot of different numbers that define the kind of borrower we are. There are three major credit bureaus – Equifax, Experian and TransUnion®. Between those bureaus, you could have as many as six different credit scores between two different scoring systems, FICO® and VantageScore®. If you’re paying attention to your score in the process of looking for a loan while trying to make sense of what it means, it can all get very confusing very fast.
In this article, we’ll take you inside the black box and break down how these systems measure your creditworthiness as well as what it means for your loan prospects. Following that, we’ll talk about how different industries apply this information differently. As an example, we’ll finish by looking at how credit is measured in the mortgage industry.
What Are The Credit Bureaus?
When lenders qualify you for a loan, they take a look at all the financial data that can be gathered on you. The credit bureaus are the keepers of this data. When you do things like apply for a loan or make a payment, that history is reported to the credit bureaus.
It’s a lot of data collected on you, but the trade-off is that you don’t have to bring in documentation on your entire life history when you get a loan.
What Are FICO® And VantageScore®?
Once all of that data is collected, it becomes necessary for them to decide whether you actually qualify for a loan. At that point, you really want an objective measure of your credit qualifications rather than some loan officer trying to judge your creditworthiness on the basis of how you dress or how you look. You need to have credit standards.
The FICO® Score was developed in 1989 by Fair, Isaac and Company. In 2006, the major credit bureaus banded together to create a more consumer-friendly educational model of credit in the form of VantageScore®. This isn’t the case for every application, but generally lenders use FICO® as an official barometer of creditworthiness when you apply. VantageScore® is better for getting an understanding of your score in figuring out where there’s the most room for improvement.
However, both companies have the same essential mission: They exist to help lenders determine the level of risk associated with giving a consumer a loan. At the same time, lenders use them to make a business decision on whether to extend credit or a loan and under what terms.
What’s The Range For Credit Scores?
While it wasn’t always this way, the scoring range for both the main FICO® Score and all VantageScores® are on a scale between 300 – 850. A good FICO® Score is considered anything above 670. On the VantageScore®side, anything above 700 is considered good credit.
FICO® has special, industry-specific scoring ranges for credit cards and auto loans with scores ranging from 250 – 900. There’s also a special mortgage score, although it follows the same scale as the general score.
What Goes Into Your Credit Score?
FICO® and VantageScore® are very similar in terms of how they rate your creditworthiness, but there are some differences. Let’s break down the models.How FICO® WorksFICO® is based on five factors. The categories and their respective weights are as follows:
- Payment history (35%): Payment history is pretty self-explanatory. If you make your payment on time, it’s good for your score. If you pay late, it’s bad for your score. You do have some leeway here because payments aren’t reported as late until 30 days after the due date. Also included as negative marks in this category are things like collections and charge-offs.
- Amounts owed (30%): This takes a look at the amount you owe on both revolving and installment loans. However, as a practical matter, installment loans don’t have as big of an impact in this category because these loans are meant to be paid off over time and the payment itself doesn’t usually change. Lenders pay much more attention to the credit utilization on revolving accounts, such as your credit cards. Essentially, you want to be using your credit cards so that the accounts remain active and you’re using credit, but if you keep high balances, it’s a sign of overextension. If you pay off the balance every month, not only are you not paying interest, but this is good for your credit score.
- Length of credit history (15%): The longer your credit history is, the better. The theory here is that the longer you’ve been able to show good habits, the lower risk you are. However, it’s not weighted as highly as other factors, so people who are new to credit shouldn’t be discouraged.
- Credit mix (10%): It’s better for your credit score if you have a mix of revolving and installment loans. However, this affects your score much less than things like payment history and amounts owed, so you can build good credit early on with a credit card account or two.
- New credit (10%): Each time you apply for or open a new credit account, your credit score takes a bit of a hit. This is because the need for a new account could mean that you’re extended beyond your means. However, if you consistently do the right thing by making payments on time and keeping more balances, your credit should bounce back in short order.
How VantageScore® WorksThe VantageScore® model takes into account six factors. The factors aren’t broken down by percentile, but relative weights are listed.
- Payment history (extremely influential): Like its counterpart, the VantageScore® system takes into account your payment history first and foremost. This category includes reports on whether you’re current, any late payments and anything that has been charged-off or is in collections.
- Age and type of credit (highly influential): Combining two categories from the FICO® model, this takes into account both the age of your credit history and the mix of accounts between installment and revolving loans.
- Percentage of credit limit used (highly influential): This looks very specifically at your credit utilization on revolving accounts like credit cards. If you do carry a balance, it’s a good idea under this model to keep the balance under 30% of your credit limit.
- Total balances/debts (moderately influential): This looks at your balances on outstanding debt as well as the amount of credit you use on credit cards. Paying down your debts will help your credit score.
- Recent credit behavior (less influential): If you open too many accounts over a short period of time, it can hurt your score because lenders are worried about you having limited resources if you have to take out new credit.
- Available credit (least influential): The amount of credit you have available to you has an impact on your VantageScore®. The best idea is to only open on the amount of credit that you need.
What’s Not Included In Your Credit Score?
Whatever model is being used, the only information that’s taken into account is what shows up in your credit report. This means a couple of things for those concerned about improving their score.
First, not every account shows up. Things like utility, cable and phone bills aren’t factored into your score because they’re neither credit nor a loan. With that said, you certainly want to pay these bills on time because late payments, as well as accounts that have been charged-off or gone into collections, can be reported on credit. There are some scoring systems available through individual credit bureaus where these bills may be taken into account, but neither of the two major models factors them in.
Secondly, there are no discriminatory factors taken into account such as race, religion, nationality or gender. Nothing related to your job is considered either, eliminating things like salary, occupation and title.
Why Is My FICO® Higher Than My VantageScore®?
More often than not, you may find that there’s significant variation between the two models. This is to be expected because they take a look at different things and weigh them differently.
There are also different models of FICO® being used between bureaus along with different models of VantageScore®. FICO® models vary and they can have a different formulation depending on where the lender sources them from. Currently, VantageScore 3.0® is a very commonly used version. With this variation, it’s not uncommon for one score to be higher or lower than the other.
Why Does My Score Vary Between Bureaus?
There are differences in the models, but you may be wondering why your score can be different between the credit bureaus even when the same FICO® or VantageScore® is looked at.
One key thing to be aware of is that not every lender or creditor reports to every bureau, so you may have some loans or accounts that show up on one report and not others. The score for each bureau is only based on the information it’s able to collect.
Credit And Your Mortgage
Before I wrap this up, let’s look at how these different scores impact your credit when applying for a loan. In this case, we’ll be taking a look at a mortgage.
The Credit Score You Need For A Mortgage
All the major mortgage investors that have home loan programs take a look at your FICO® Score. When it comes to a mortgage, VantageScore® can be helpful in seeing where you need to improve and how you’re trending, but it’s more of a guidepost.
Mortgage lenders and investors may have different requirements. The following are based on the guidelines of our friends at Quicken Loans®.
You can get a loan through FHA with a median FICO® Score of as low as 580. However, it’s important to note that you’ll really have to keep minimal debt with a credit score this low. You’ll also be required to have a debt-to-income ratio (DTI) of no higher than 38% before the house payment is included and 45% afterward. If you have a median score of 620 or higher, you can have a higher DTI which could help you afford more home if you need it.
With a VA loan for qualifying service members, veterans and surviving spouses, there’s no specific minimum credit score required, but lenders can set their own policies. At Quicken Loans, the minimum median score for qualification is 620.
Conventional loans require a median FICO® Score of 620 or higher as a general guideline.
The minimum score for USDA loans at Quicken Loans is 640, although there are no specific minimums required by the USDA. This loan is available to people looking to live in certain rural areas or those on the edge of suburbia who meet income restrictions.
Your Credit Report And Your Mortgage
You’ll notice the score we were referring to above was a median FICO® Score. That’s because mortgage lenders look at the median credit score between the three major credit bureaus and then analyze information from all three. They’ll use either what’s called a tri-merged credit report or a residential mortgage credit report (RMCR).
A tri-merged report is one in which all the information on each of your credit reports is just transcribed on one sheet. You can get this information if you do credit monitoring, so that limits the amount of surprises.
The RMCR is a little more specialized to the mortgage industry and shows some different things which lenders are looking at when assessing risk. For example, one of the things Fannie Mae looks at is trended credit. You can’t get a Fannie Mae conventional loan with a DTI of higher than 50%, but it’s also important to have an understanding of where you’re at if you’re just below that number. A person with a DTI of higher than 45% who pays all or most of their credit card balance will be more likely to get approved than someone who has a similar DTI but makes a minimum payment, thereby carrying a higher balance.
Now that you understand the differences between FICO® and VantageScore®, it’s time to see how you’re doing. By checking your credit with Rocket HQSM, you can see your VantageScore 3.0® credit report and score from TransUnion® every week. In addition to the score itself, you’ll receive personalized tips on what you can do to improve your score.
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