Understanding Credit Scores: FICO vs. VantageScore
Checking your credit score is one of the first things borrowers are urged to do when shopping for a mortgage. But these days, you need to know which type of credit score you're getting.
A new credit scoring system, called VantageScore, is being promoted by the three major credit reporting bureaus. It was developed by them as an alternative to the dominant FICO credit scoring system that lenders have traditionally relied on.
For consumers, the biggest difference between the two is how they report your credit score. The FICO system reports scores on a range from 301-850, with higher scores signaling better credit. The VantageScore system operates in a similar manner, but uses a range from 501-990. So while a score of 770 represents excellent credit under FICO, it's a fairly middling score under the VantageScore system.
Why a new credit scoring system?
So why did the three credit reporting companies, Experian, Equifax and Transunion, develop the new system in the first place? They say one reason is for consistency - FICO scores frequently vary when reported by the three different bureaus. They also say the new system is easier to understand; every hundred point range in the VantageScore system corresponds to a letter grade - A, B, C, D or F - that gives the consumer an instinctive feel for where their credit stands.
However, skeptics note that the main reason FICO scores vary among the three credit bureaus is because lenders don't always report the same information on a borrower to all three - some lenders and creditors may only report borrower performance to one of them, for example. The new system doesn't fix that.
A bigger reason is likely because the three credit agencies have to pay FICO's parent company, the Fair Isaac Co., licensing fees for using the FICO system. Since they developed the VantageScore system, they don't have to pay another company for using it - provided they can get lenders to embrace it instead of FICO as the primary system for evaluating consumer credit worthiness.
That doesn't seem likely to happen, at least in the immediate future. Fannie Mae, Freddie Mac and the FHA all use rely on FICO scores for evaluating credit, and as they go, so goes the mortgage industry. At the same time, you may still encounter the VantageScore system from time to time, so it helps to understand how it works.
How to compare FICO vs VantageScores?
The first thing to know is how the scores compare. According to Credit.com, the scores roughly correlate as follows:
The VantageScore system has some other differences as well. The credit bureaus say it does a better job of assessing risk for consumers who don't use credit frequently, claiming that someone who doesn't use an account for six months risks having that record dropped from their FICO rating. The VantageScore system covers a 24-month range, which they say provides a fuller picture.
The two also differ in the factors they weigh in producing a credit score, with VantageScore placing greater emphasis on a borrower's debt-to-credit ratio and recent credit inquiries and new accounts. FICO places greater emphasis on types of credit used and puts slightly more importance on payment history and total debt.
VantageScore easier to get
If you're ordering your credit score, the VantageScore can be easier and cheaper to obtain. By law, you're entitled to a free copy of your credit report each year from each of three credit reporting bureaus, but that doesn't include the credit score. Only one of the three, Equifax, allows you to order your FICO score through www.annualcreditreport.com, the official web site established for consumers to order their free credit reports. Experian does not provide FICO scores to consumers, only to lenders, and Transunion charges at least $15 for a FICO score, vs. providing a VantageScore free of charge with the annual credit report.
You can order Transunion and Equifax FICO scores and credit reports directly from MyFICO at www.myfico.com for a fee. But if you find it easier and cheaper to order VantageScores along with your free reports from the official web site, you can use the table above to get an approximate idea of what your FICO score should be.
Other credit rating systems
Be aware, though, that the credit bureaus also offer other types of credit scores as well - Transunion offers the TransRisk score and Experian the PLUS score, for example. Both of these roughly approximate the range of FICO scores, but you should be aware of exactly which product you're ordering.
At present, VantageScores are only used by a small number of lenders - legal filings last year put the figure at under 6 percent of the market. However, that figure will grow if the three credit reporting companies are successful in making it the preferred system for evaluating consumer creditworthiness. In the meantime, as a consumer, you just need to be aware that there are different credit scoring systems out there and know approximately how scores from each relate to the other.