FICO® and VantageScore® are the two biggest credit-scoring models in the business, so it’s important that mortgage applicants (and lenders) understand the similarities and differences between each. Here’s what you should know about the two.
The FICO model, developed by the Fair Isaac Corporation, was introduced to lenders in 1989, and has long been required by Fannie and Freddie as the principal model in determining creditworthiness.
However, over the past decade, FICO’s monopoly has been challenged by VantageScore, a similar model established by the three major credit bureaus- Experian, Transunion and Equifax.
Although the law has mandated that Fannie and Freddie use FICO, it appears times may be changing. According to an August 2019 ruling set forth by the Federal Housing Finance Agency, GSEs will now have to consider credit score alternatives like VantageScore when determining a mortgage applicant's creditworthiness.
So what’s the difference between the two models?
On the surface, both might seem similar. In fact, they each follow the same criteria: payment history, length of credit, types of credit, credit usage, and recent inquiries. And they both adhere to the same 300-850 range. However, your score might vary depending on the model you’re looking at- and here’s why:
If you’re new to the credit scene, you’ll want to measure your creditworthiness using the VantageScore. Consumers who have trade lines between one and six months would be considered “unscorable” under the FICO format, but are eligible to receive a score using Vantage. So if you don’t have a profound credit history, there’s a chance you might still have a VantageScore.
The factors that impact your score might carry different weights, depending on the model you’re looking at. FICO’s factor breakdown looks like this:
- 35% Credit history
- 30% Credit Utilization
- 15% Length of credit history
- 10% how your credit is mixed
- 10% new accounts opened
VantageScore’s calculation considers similar factors, but there is a noticeable difference in weights:
- 40% Credit history
- 21% age and type of credit
- 20% Credit utilization
- 11% Balances
- 5% Recent credit
- 3% Available credit
So your score could certainly be impacted based on the type you’re using. For example, if your credit utilization ratio is higher, you might want to examine your VantageScore, because it places a smaller weight on credit utilization.
When you apply for a new line of credit, creditors will pull your credit report. This is called an “inquiry”. Typically, multiple inquiries in a short time period can be of detriment to your score, but the rules vary based on which platform is calculating your score.
If you’re shopping for a mortgage, there’s a chance that multiple creditors will pull your credit in a short time period- FICO understands this might be the case, so multiple inquiries recorded within a 45-day span are counted as just one inquiry.
Vantage recognizes this too, but only offers a 14-day window. So if you’re shopping for a mortgage, be advised that your score could drop if multiple lenders pull your credit over a 3 week span.
The impact collections can have on your account can be significant, but the extent can vary based on the type and the amount of the collection.
For instance, the latest versions of both FICO and VantageScores both give less weight to medical collections. However, older FICO models don’t distinguish between medical and non-medical accounts, so be mindful of which version your creditor is using.
The amount of the collection also has different impacts for each model. FICO ignores collection accounts when their original unpaid balances were less than $100, whereas the VantageScore does not offer an exemption for low-balance accounts- so even the smallest collections could harm your score.
Differences aside, be responsible.
Small differences aside, responsible behavior will always benefit your score. Remember, regardless of the differences, the goal of both models is to assess your overall creditworthiness. That being said, if you focus on maintaining a good credit history, you’re bound to be rewarded.