History of FICO Credit Score
It used to be that lenders had a problem determine consumer behavior. It was difficult to determine the borrower who will be able to pay off a loan and one who cannot.
The Fair Isaac Corporation started evaluating consumer behavior in 1956; they used information from the credit reporting bureaus. They later introduced the FICO credit score in 1989.
The score was quickly adopted and many lenders started using it. The score helped lenders to make quick decisions with regards to borrowers’ eligibility for credit facilities.
Lenders can easily compare credit scores than going through several sheets of credit history.
What is Credit?
Credit is money you borrow from a financial institution. Credit usually attracts an interest rate and a loan processing fee. You will be expected to make monthly payments for an agreed period. The monthly payment will be based on the loan amount. It is usually fixed.
Credit Score Basics
A credit score is a three-digit number that shows your creditworthiness. This is what financial institutions and mortgage companies use to determine the amount you can afford in terms of credit.
If you pay your bills on time, use a small percentage of your available credit, pay your loans on time, and pay up your credit card balance fully at the end of every month, you will have a high credit score.
In the same way, if you miss payments continuously, default on your bill payments, max out your credit cards and pile up a huge debt, you will have a lower credit score.
Although there are several credit scoring systems, the most commonly used is the FICO and the VantageScore credit scoring system. Although they work on different scales, the score ranges from 300 to 850.
Other credit scoring systems include Equifax score and this ranges from 280 to 850, TransRisk which ranges from 300 to 850, VantageScore 1.0 and 2.0 range from 501 to 990, PLUS score also ranges from 330 to 830, and Experian National Equivalency Score which ranges from 360 to 840.
Although these scoring systems are different, one thing remains unchanged. With all of them, the higher the score, it better it is.
The method of determining the score for the various scoring systems may differ but the elements that influence the score are the same. As mentioned earlier, when you use your credit responsibly, it will reflect on your credit score.
The FICO Scoring Model
This credit scoring model is the most popular scoring model. It is used by many creditors. This score is now being used by several industries such that there are now industry-specific models.
For instance, a credit card company will use the FICO credit score 3 while a firm that operates in the mortgage industry will use the FICO credit score 2, 4, or 5. Apart from mortgage and credit card industry-specific credit scores, there are also auto industry-specific credit scores.
Now the commonly used FICO credit score is the FICO score 8. The FICO score 9 have been introduced as a replacement for the score 8.
The new scoring system is gradually gaining popularity. With the FICO Score 8, more emphasis is placed on the debt owed by the account owner.
VantageScore Scoring Model
This scoring model was introduced in the mid-2000s by VantageScore Solutions. This firm was formed by the three main credit reporting bureaus; Experian, Equifax, and TransUnion. Although this scoring model is not as popular as the FICO scoring model, it has gained some attention and it is fairly used.
The current VantageScore model being used is the VantageScore 3.0 and it was introduced in 2013. Although the previous VantageScore models 1.0 and 2.0 range from 501 to 990, the new model which is VantageScore model 3.0 uses the same range as the FICO score.
The new VantageScore places more importance on the age of the account although the payment history on the account also influences the score.
Credit Score Ranges
People who fall within this range have the highest rate possible. Creditors gladly offer loans to such borrowers because these borrowers have lower credit risk. People with lower credit risks are more likely to pay their loans on time. These borrowers enjoy lower rates on the credit facilities they get and they qualify for any type of credit whose qualification depends on credit score.
- FICO Score (800 to 850)
Under the FICO scoring model, any score above 800 is considered an excellent score. This score can help you to get a credit facility on the best terms. This score range can easily be compared to the best scoring model ranges on other scales.
- VantageScore 3.0 (750 to 850)
The excellent rating for the VantageScore model has a wider range when compared to that of the FICO score model. This means that if your VantageScore falls above 750, you have an excellent rating.
2. Very Good Score
People who fall within this range for both VantageScore 3.0 and FICO Score shows responsible borrowing behavior. They usually qualify for good rates and they do not struggle for loans.
- FICO Score (740 to 799)
People who have this credit score are more likely to access credit on very good terms. Unfortunately, only a few people fall within this category. Data provided by Experian indicates that on 18.2% of the total U.S population have a credit score that falls within this range.
- VantageScore 3.0
This scoring model does not have a range that is described as very good. This is one of the few differences between the two scoring models. The range that may have been considered as very good has been divided and a part of it is considered excellent while the other part is considered good.
3. Good Credit Score
People who have this score cannot get ideal rates but they will be able to access competitive rates.
- FICO Score Scale (670 to 739)
The average credit score is 670 and it falls within this category. People with this credit score barely get good competitive rates. Majority of the population who have a credit score fall under this category. 21.5% of people have a good credit score.
- VantageScore 3.0 (700 to 749)
With the VantageScore 3.0 scale, a good score can still get you a good loan at competitive rates.
Fair or Average score
People with fair credit scores do not have major negative records such as bankruptcy in their report. However, they struggle to get competitive rates and they are denied most credit facilities. Although they get approved for credit facilities, they may not get the rate they want.
- FICO Score Scale (580 to 699)
Many people who default on their loans and max their credit cards are likely to fall within this range. Over 20% of the United States population fall within this category.
- VantageScore 3.0 (699 to 650)
This category has the average score (673) for VantageScore. This category is one of the popular categories among the VantageScore categories.
People who fall within this category get credit facilities at one of the highest rate possible. The rates at which they acquire credit facilities are, however, better than those with very poor or bad credit scores. They also have access to limited credit facilities.
When they are fortunate to qualify for a mortgage, they need to make larger down payments. Lenders are reluctant to offer credit to people within this category because they have a history of defaulting on their loans.
- FICO Scale
The FICO scale does not have a poor rating. The FICO score moves directly from fair to bad.
- VantageScore 3.0 Scale (550 to 649)
Majority of VantageScore credit score holders have a poor credit score. They have limited access to credit facilities and are less likely to enjoy competitive rates.
Very Poor or Bad
If you have a poor or very bad credit score, you should consider repairing your credit score. It is difficult to get credit when your credit score falls in this category.
- FICO Scale (300 to 579)
People who have major delinquencies such as bankruptcy fall within this category. Such people are less likely to get credit facilities. Unless they are offered credit based on their current income and not their credit score.
It is good to note that it is rare for people to have credit scores as low as 300. Even people who have been through difficult bankruptcy cases have a minimum credit score of 400.
- VantageScore 3.0 (300 to 549)
This is also the lowest credit score range for this scoring model. People with this score do not get access to credit facilities easily. Even if they do, they get the credit at a very high interest rate.
Factors that Affect Your Credit Score
They include the following:
- Payment history which includes records for your loan payments, and credit card balance payments.
- Total debt
- Credit utilization ratio
- Public records, a typical example is a bankruptcy.
- Number of new credit accounts
- Number, age, and type of credit
Factors that Affect your FICO Credit Score
These factors have been arranged in order of importance:
- Payment history
- Total debts
- Length of credit history
- Credit mix
Factors that Affect your VantageScore
These factors have also been arranged in order of importance:
- Payment history
- Age and type of credit as well as the percentage of available credit used
- Total debts
- Recent credit inquiries.
Although there is a general perception on what a good credit score is, lenders also have a huge role to play in determining the acceptable credit score. Some lenders may not accept even the average credit score, however, some of them will also accept a poor credit score.
The type of credit scoring system used also influences the decision. It is important that you check lenders and go with one who will accept your score. If you have a poor score, you should consider repairing your credit.