Credit can be confusing. Since there are few classes in high school or college that teach people how your credit score works, it’s easy to get lost or to get bad advise from a friend. Also, there are so many kinds of credit scores listed online that it can be hard to know which one to use. The score that we are going to focus on is the one that is used most frequently by banks and lenders: the Fair Isaac Company (FICO) credit score.
How Your Credit Score Works
To understand how your credit score works, you must first understand the credit reporting system and what makes up their complex algorithm. Once you understand this, you will be able to master your own credit and get the best possible interest rate on a home loan, car loan or credit card. Having a strong credit profile will benefit you, as recent studies show that the average American with a 700 credit score or higher, will save an average of $4,500 per year on their normal expenses. Your credit is checked before you do any Banking transaction, when you get an insurance policy and even when you apply for a job. If you don’t have excellent credit, you will pay for it in the end. You will have higher interest rates, higher insurance premiums and you could even be denied for a job. So make sure you pay attention and you fully understand how your credit score works.
What is a FICO Credit Score
Engineer William Fair and mathematician Earl Isaac founded the Fair Isaac Company in 1956. By 1958, Fair and Isaac had created their first credit risk algorithm and pitched the idea to 50 lenders. The first general purpose FICO score was created in 1989 and is still used today. A FICO score ranges from 300-850 and is used by lenders to gauge a borrower’s credit-worthiness. A FICO score is based a mathematical algorithm that takes into account an individual’s credit reports from three credit-reporting agencies: Equifax, Experian, and Transunion. The algorithm determines a person’s risk of going 90 days late on an account in the next 24 months. Since FICO is the standard score that lenders use for making lending decisions, it is the most important credit score you have. There are many imitation scores online, and even the score you get through the credit bureau websites are not your real FICO credit score. The only place to view your real FICO score online is through MyFICO.com.
Why Your FICO Credit Score Is Important
Having a strong credit profile will allow you to get the best possible interest rate on a home loan, car loan, or credit card. Recent studies show that the average American with a FICO score of 700 or higher will save an average of $4,500 per year on their normal expenses. Your credit score is checked before you do any banking transaction, when you get an insurance policy, and even when you apply for a job. If you don’t have excellent credit, you will pay for it in the end. You will have higher interest rates, higher insurance premiums, and you could even be denied a job. So make sure you pay attention and you fully understand how your credit score works.
How Your FICO Credit Score Works
You have three FICO credit scores, one for each major credit bureau: Equifax, Experian & Transunion. Since each credit bureau collects different information and adds it to your credit profile, you will usually have three different value scores. When you are applying for a mortgage loan, they will take the middle of the three scores and use that to qualify you for the loan. If your information with all three credit agencies is identical, your three scores should be identical, too, but that’s very rare. To get a credit score, you need to have some positive credit history, or you won’t have a score, which is bad. All you need to propagate a score is to have at least one open account with a minimum of six months of history. That account will need to have at least one payment made on it within the last six months. If you have no positive credit history and need to start building your credit scores fast, try getting an Authorized User Tradeline.
Different Types Of Credit Scores
There are actually over 16 different types of FICO credit scores that exist today. Each score is a little different in order to cater to the specific industry it’s being used for. Different types of FICO credit scores include, but are not limited to:
- Educational Scores – Usually from online credit monitoring companies (I call these a Fake-O score). Educational scores are used to predict your FICO score, but are often times inaccurate.
- Mortgage Risk Score – Used to determine your risk of paying back a Mortgage Loan
- Auto Loan Scores – Used to determine the risk of defaulting on an Auto Loan
- Vantage Credit Score – Very similar to the FICO score, but created by the Credit Bureaus, so they don’t have to pay FICO for every credit score they publish.
How Vantage Credit Scores Work
Vantage Score was created by the credit bureaus in 2006. The bureaus got fed up with paying the Fair Isaac Company every time they wanted to include a credit score on a credit report, so they created their own algorithm. However, Vantage Scores are not widely used by lenders, and FICO is still the industry leader. Vantage 2.0 Scores go up to 990, so a 700 Vantage 2.0 Score isn’t a good score, but a 700 FICO is a good score. One of the main reasons the Vantage Score hasn’t been widely accepted is because of the score variations from the FICO model. Vantage recently changed its scores with the Vantage 3.0 update and now the score only goes up to 850. I personally don’t care much for the Vantage Score, but I’m sure that sometime in the near future these scores will start to matter.
Vantage Credit Score Vs FICO Credit Score
Vantage scores are based on six variables, where the FICO score is based on 5:
FICO Credit Score Factors
- 35% – Payment history
- 15% – Length of credit history
- 30% – Amount of debt owed
- 10% – Mix of credit account types
- 10% – New credit
Vantage Credit Score Factors
- 32% – Payment history
- 23% – Credit utilization (amount owed vs available credit)
- 15% – Balances
- 13% – Depth of credit
- 10% – Recent credit
- 7% – Available credit
Want to learn more? Watch the How your credit score works video:
We can help you improve your Credit Scores
If you have problems with your credit, or you think there are some inaccurate items that are weighing down your credit scores, you can always reach out to us to schedule a free credit audit and consultation. Our Credit Repair website is BetterCreditGuaranteed.com
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