Credit Scores

What is a Credit Score?

Although they are closely related, credit reports and credit scores are two completely different things.

Credit scores are typically three-digit numbers that represent the quality of your overall credit-worthiness. Many different types of credit scores exist, but the two most often used is the FICO score and the VantageScore.

Five main factors affect your credit score. Those factors and the percentage weights they carry in determining your score are as follows:Credit Score Graph

  • Payment history (35%)
  • Amount of debt (30%)
  • Types of accounts (10%)
  • How long you’ve had credit (15%)
  • Your history of looking for credit (inquiries) (10%)

You should try to learn about each of these factors and how you can change your financial behaviors to improve your credit score.

FICO: The Company

The FICO score was developed by a company called Fair Isaac (known as FICO), which was started by engineer Bill Fair and mathematician Earl Isaac in 1959. One year after the company’s inception, it was hired to program and install a complete billing system for one of the first credit cards, the Carte Blanche.

Since that time, FICO has grown in influence and scope. Today, it boasts a client list that includes nine of the top-ten companies in the Fortune 500 and two-thirds of the top one hundred banks in the world.

From the Fair Issac website About page:

FICO™ (NYSE:FICO) is the leader in Decision Management, transforming business by making every decision count. We use predictive analytics to help businesses automate, improve and connect decisions across organizational silos and customer lifecycles.

VantageScore

Initially launched in 2006, VantageScore was developed to improve scoring consistency among the three major credit reporting organizations —Equifax, Experian and TransUnion.

According to the VantageScore website, VantageScore 2.0, released in January of 2011, pulls from recent lending environments to be as accurate and predictive as possible for the credit lenders while providing clarity to consumers.

VantageScore Model

Unlike the FICO score, the VantageScore has six criteria that affect your credit score. The criteria percentages which determine your score are as follows:

  • Recent Credit (30%) – Measures the number of recently opened lines of credit and credit inquiries a consumer has on file.
  • Payment History (28%) – Scored as satisfactory, delinquent or derogatory, a history of late payments can negatively impact your credit scores. Creditors typically report those payments that are late by one day in with payments received after 59 days of a payment’s due date.
  • Utilization (23%) – Determines how much of a consumer’s available total credit is currently being used. Consumers who have “maxed out” their lines of credits may find it difficult to receive additional credit or have access to the best terms.
  • Balances (9%) – Assessing consumers’ current and past balances provides insight into their borrowing history and liquidity.
  • Depth of Credit (9%) – Evaluates the length of a consumer’s credit history. Having long-term credit relationships is important under this criterion; however, a diverse mix of credit such as loans and credit cards is advantageous.
  • Available Credit (1%) – Analyzes the balances of your current lines of credit. Keeping low balances at 30% of their total available credit can assist consumers.

VantageScore Grading Scale

VantageScore model also provides consumers with a letter grade classification associated to the numeric score which ranges from 501 to 990.

  • “A” is the numeric equivalent to 900-990
  • “B” is the numeric equivalent to 800-899
  • “C” is the numeric equivalent to 700-799
  • “D” is the numeric equivalent to 600-699
  • “F” is the numeric equivalent to 599 and below

According to Experian, research has revealed that the average credit score for consumers was 748 as of August of 2010.