You’re probably already aware of the importance of your credit score, and you should aim to do annual credit reports to assess your financial standing, whether in a personal context or for business. Your credit score will have an influence on many different things, including your eligibility for credit or loans, which in turn has an effect on your business and cash flow.
But did you know there are a variety of different ways of performing full credit reports? This can change your final result, and so it’s important to understand how these credit reports work and the effect this has on your credit score. The two main credit scoring methods are FICO and VantageScore, which will be explained further in this guide.
Keep reading to find out more about the different types of credit score and how they work.
What is credit score?
Before getting into the different types of credit score, it’s important to first establish the definition. Put simply, a credit score is a measure of eligibility for different forms of credit, from business loans to credit cards.
A low credit score indicates a higher credit risk and therefore more difficulty acquiring these kinds of credit, whereas a high credit score indicates a lower risk and therefore a higher possibility of approval for loans and credit.
The credit score is calculated through a credit report check, which is an analysis of your borrowing and payment history. Through analysis of this information, a three-digit number is produced to succinctly reflect this credit history. So, if you have a history of making payments on time then you are likely to have a higher score, whereas those who have missed or made late payments are likely to have a lower score.
The FICO model
The FICO credit report check model was established in the 1980s and remains one of the most popular measures of credit worthiness, with over 90% of top lenders using it for lending decisions.
The FICO score is a full credit report that is calculated based on a number of different factors in different proportions. Namely, this is:
35% based on payment history
30% on total debt
15% on the length of credit history
10% on credit mix, which refers to the types of accounts that you hold
10% on new credit
These different factors can in fact vary, but the above serves as a good overall guide for how different elements can influence your annual credit report. In addition, FICO offers industry-specific scoring models, such as the FICO Auto Score which is used for purchasing cars or the FICO Bankcard score for credit card applications.
FICO also offers classification of the different scores. A score between 781-850 is considered excellent, between 661-780 is good, and 601-660 is fair. Below this, the scores are evaluated more negatively, with 500-600 classified as poor and 300-499 as very poor.
The VantageScore Model
The other most commonly used model for full credit reports is known as the VantageScore model, which was created in 2006 as part of a collaboration between the major credit bureaus Equifax, Experian and TransUnion. This was developed as an alternative to the FICO model, and although it uses the same factors to determine credit score, these are given different weighting.
One of the most important differences with this model is that greater weight is given to credit card balances and credit utilisation ratio, as opposed to payment history, which is the most important factor in the FICO model.
Scores are assessed in the same way as the FICO model, with scores above 661 considered as either good or excellent, and anything below 601 considered to be poor.
Although FICO and VantageScore are the most popular credit report models, others do also exist, such as the Equifax model. Make sure to always check the fine print when you are taking out a loan or credit so that you can identify what kind of credit scoring model they use.
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