Beyond your basic credit report, there are companies who try to predict your financial behavior. They take your credit report and give weight to certain component parts of it to create your credit score. There are two main credit scores-FICO and VantageScore.
What is FICO? That stands for Fair Isaac and Co., a company that helps other companies determine a person’s credit risk based on a person’s credit history. The FICO score is the most widely used. According to their website, FICO provides predictions of consumer behavior to help businesses make “faster, more profitable decisions.” What that really means is, they give you a number and based on the number, you will or won’t qualify for credit. FICO is a score that is widely used by banks and mortgage companies to determine whether you will qualify for a loan or a mortgage.
The FICO score gives certain weights to your credit history—for example, your payment history represents 35% of your FICO score; your amounts owed is 30%; the length of time you have had credit accounts for 15% of your FICO score, new credit is 10%, and the type of credit you have is 10%. FICO scores range between 300 and 850. Of that, you want a score around the mid-700s. The higher the FICO credit score, the better. A credit score below 600 means you are a higher credit risk—so, lenders may not want to lend to you or, if they do, they will charge higher interest to lend you money.
How do you fix your FICO score or maintain good credit?
- On your “payment history,” pay your bills on time. Late payments and collections will hurt your score. If you have missed payments, get current and stay current. Information is constantly updated so even if you have had trouble in the past, your current status as a good credit is important. You need to know that paying off a collection account will not remove it from your report—it will usually stay on your report for seven years. If you are having trouble paying your creditors, contact them and work out a payment plan—showing consistent payments to the creditors should help to repair your scores.
- On your “amounts owed,” if you owe more than 30% of your credit card’s limit, your FICO score will be lowered. Try to keep your balances low. Pay off your debt rather than acquire more credit cards. DO not close credit card accounts to increase your score or open more credit card accounts just to increase the available credit you have. Those actions can lower your score.
- If you are new to credit, don’t obtain many new accounts in a short period of time—new accounts will lower your average account age which will have a larger effect on your credit score than if you didn’t have a lot of credit information. Credit history must be built up over time. Open a couple of credit card accounts, pay regularly and let the history build.
- On “new credit,” be careful. Your FICO score can be lowered just by the number of inquiries for your score from multiple creditors—even if they do not extend credit to you. If you want to shop for a rate, do so within a discrete period of time, like 30 days, so that it does not appear that you are seeking massive amounts of credit from many creditors. It is fine to request your own credit report. That will not affect your score.
- On “types of credit” you should apply for and open new credit card accounts only as needed. More accounts will not raise your score. If you have a new credit card, use it sparingly and pay it off quickly. Someone with no credit cards will have a lower score than someone who has paid off their credit cards responsibly.
All of these tips are also applicable to the relatively new credit scoring system created by the three national credit bureaus, Trans Union, Experian and Equifax, called VantageScore, created in 2006.
The three agencies have advertised VantageScore as something that will help banks and lenders further drill down into “subprime categories.” Subprime lenders are banks or other lenders dedicated to borrowers with less than perfect credit or harder to substantiate credit. This is a difficult area—subprime already means the borrower has problems. It appears the VantageScore is an attempt to differentiate sub-prime borrowers based on certain payment categories.
Like FICO, VantageScore provides different weights to different components of credit.
Unlike a FICO score, which ranges from 300-850, the VantageScore ranges from 501-990. What are the Vantage Score calculation categories? Payment history how timely and consistent your payments are, accounts for 32% of your score; Credit Utilization, the debt-to-credit ratios and how much credit you have available, represents the next highest category at 23%, Credit Balances—what your total debt it (delinquent debt is counted more negatively than current debt) accounts for 15% of your score, Depth of Credit or length of credit history represents 13%, Recent Credit-how recent and many new hard inquiries and new accounts there are represents 10% of the score and Available Credit-how much credit you can access short-term represents 7%.
The problem with VantageScore is that the exact details of how the VantageScore is calculated are unknown. What contributes to a positive score in each category and to what degree particular information will fit a category is unknown. The score is intended to show the likelihood that a customer will pay the loan back on time and in a consistent manner. Any values which show behavior contrary to that will worsen the score.
Your credit score is critical to whether or not you can obtain a loan. Do not take it for granted. Pull your credit report, check it for errors, dispute the errors and monitor your credit report consistently. If your FICO or VantageScores are low, try the tips we have suggested to raise the score and research this area by going to the FICO and VantageScore websites at. and VantageScore.com for further information.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.