VantageScore: What Is It? How Does It Work?

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A VantageScore is a credit scoring model used by a growing number of financial institutions in order to determine a loan applicant's credit worthiness. The model was introduced in 2006, in order to compete against FICO, which up until then was the only option available to lenders. Though it functions similarly, the VantageScore model contains some significant differences from FICO that can lead to advantages or disadvantages for certain users.

Currently, the average VantageScore in the United States stands at around 671.

What Is A VantageScore?

The VantageScore 3.0, the latest version of the model, pulls data from the three major credit reporting bureaus: TransUnion, Equifax, and Experian. It then generates a score between 300 to 850 -– the higher your score, the better. Lenders will then use this number to decide whether or not to extend you a line of credit.

  • Poor credit is considered anyone with a VantageScore score under 630
  • Average or Fair credit rating will be between 630 and 690
  • Good Credit is between 690 and 720
  • Excellent credit is anything above 720

The Components Of Your VantageScore

Payment history, the most important component of your VantageScore, refers to whether or not you have pay your bills on time. While you aren't rewarded for timely payments, your score is docked whenever you are late. To lenders, individuals who frequently pay their bills late may indicate financial hardship. This creates a liability for them, as such users may not be able to pay back their loan the next time they they receive a bill.

Depth of credit refers to the age of your credit history and the type of accounts you've had opened. The older your average age of credit accounts, and the more diverse types of loans you've received (credit cards, auto loans, mortgages, etc.), the better your score will be. In assessing credit worthiness, having a long track record of a certain behavior makes an individual more predictable. If you've had excellent credit behavior for 10 years, a lender will see you as more likely to continue that behavior than if you only had similar performance for one year.

Utilization and available credit refers to how much of your total revolving credit you use. For example, if you have a $5,000 line of credit, and in one month you use $2,500, your credit utilization would be 50%. Available credit is simply the remaining credit you haven't spent, and looks at how much breathing room you have. The lower your credit utilization, the better your score will be. Lenders see high credit utilization as a sign of an individual's dependence on credit. If you consistently get close to maxing out your credit cards, it may be a sign that your finances are not stable. As a rule of thumb, it's generally recommended you keep your credit utilization below 30%.

Balances are your total outstanding loans. Individuals who are heavily in debt are penalized, especially if the debt is past due and going into collections.

Recent credit is the number of hard inquiries that have been made into your account. A hard inquiry occurs when a lender looks into your credit history in order to assess your credit worthiness. If you have a high frequency of these on your account, a financial institution may view you as desperate for credit, and therefore financially unstable. The total number of inquiries does not matter, as much as their frequency. If enough time passes since the last time a hard inquiry has been done on your account it will not count against you.

FICO vs VantageScore: Major Differences

Though FICO is more widely used, a greater number of financial institutions are turning to VantageScore due to its use of alternative data. Some individuals who are unscorable with the current FICO 8 standards may be eligible to receive a VantageScore. The company estimates it can generate scores for 30-35 million users who would not be eligible to receive a FICO score.

Another major difference between this and other scoring models is that it does not factor in paid collections accounts that have been fully paid off. This can be a major distinction for individuals whose outstanding debt been sent to collections in the past. Such an event can weigh down your FICO score for years after the fact, even if the matter has been settled.

Main Differences Between Vantage 3.0 and FICO 8 Scores:

  • FICO develops scores considering data from each of the credit reporting agencies separately. That means you may get a different score depending on whether your file is pulled from TransUnion, Equifax, or Experian. A VantageScore is a combination of all three.
  • You’re more likely to have a VantageScore than a FICO score. The latter will not be generated unless you have a credit file that’s six months old or older. VantageScores, on the other hand, require you to have just one month, and at least one account reported to one of the credit reporting agencies in the last two years.
  • VantageScores are harsher on individuals who are late on paying their mortgage. FICO treats all late payments with the same severity.
  • As mentioned above, VantageScore does not penalize individuals for any past debts sent to collections that have also been completely paid off.

Who Uses VantageScore?

VantageScore Solution, the company that issues these scores, reports that in 2015, seven of the ten largest U.S. banks and over 2,000 other lenders used the VantageScore model. FICO still holds the largest market share when it comes to credit scoring, but this alternative model is quickly catching up. 

A major reason behind FICO's dominence is the fact that VantageScores cannot be used for certain kind of mortgages -- specifically Fannie Mae or Freddie Mac. This is a major distinction, given the fact that roughly 50% of all new mortgages come through these two enterprises. In December 2015, a bill (H.R.4211) was introduced into the House of Representatives that could potentially allow VantageScores to be used in evaluating consumers seeking these mortgages, though it's currently awaiting review by the House Committee on Financial Services.

Source:
H.R.4211 - Credit Score Competition Act of 2015

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