How is Your Credit Score Calculated by FICO and VantageScore, Anyway?

Published on November 8th, 2019 by CreditFresh

Navigate your next credit report with ease by learning how FICO and VantageScore calculate your score.

white chalk drawing of a question mark on a blackboard

Your credit score is an important number when it comes to your financial health. But it’s not always easy understanding why it is the way it is.

If you’re like a lot of people, you may understand the basics — like how paying your bills on time is a good thing and paying your bills late is bad. Or, you could be like nearly four in ten of the Americans surveyed in a LendingTree survey and think you have no idea how your score is determined.

If you have questions about your credit score, don't be concerned about these money borrowing myths. Stick to the facts by checking out this guide on how the major credit scoring models calculate your credit score.

What is a Credit Score?

First, let’s start with the nuts and bolts. A credit score is a three-digit number that represents your behavior as a borrower and may give some indication as to how likely you are to pay back debt. It’s a number that may help lenders, landlords, and even employers decide if they should do business with you.

Financial institutions look at your score to predict the odds you’ll pay them back. They may also use it to determine the rates and terms available to you.

Your experience as a borrower is tied to this number. Generally, the higher your score is, the more likely you may be to get a loan with lower interest rates and higher credit limits.

What is a FICO Score?

A FICO score is a type of credit score generated by FICO, which stands for the Fair Isaac Corporation. The company was first established more than 50 years ago, at which time it assessed lending risks for a small number of lenders.

Today, FICO is the most popular way consumers and financial institutions see scores.

What Are the Different FICO Scores?

Generally, FICO scores range between 300 and 850. Where you fall on this scale determines your rating.

atings are like the letter grade that correspond with specific numerical ranges. FICO breaks down its scale into five ratings or categories, as you can see in the table below:

Rating Score
Poor 300-579
Fair 580–669
Good 670–739
Very Good 740–799
Exceptional 800–850

What is the Highest Possible FICO Score?

At the peak of the FICO credit scale, 850 is the highest FICO score you can possibly get. This squeaky-clean score can come with some financial advantages. You may be more likely to get approved for loans, and it can improve your chances of getting the best rates with more flexible terms. However, lenders don’t often make much of a distinction between scores that fall into the “exceptional” range of 800 to 850, so achieving a score of 850 may not necessarily yield any more benefits than a score of 800.

On the other end, three hundred is the lowest possible number you can get. It doesn’t come with any perks, so it’s not something you want to see on your report. Something this low will likely complicate getting a loan or personal line of credit with competitive rates.

Both 300 and 850 represent the fringe scores of the FICO model, so they aren’t very common. Only 1.2 percent can boast a flawless 850 and less than 5 percent of Americans fall between 300–499.

Most people fall somewhere in the middle. In fact, the average FICO score in 2019 is 703.

person drawing on a brightly coloured mind map on a table with laptop camera papers cactus notebook and person holding coffee mug

How is a FICO Score Calculated?

FICO determines your score, and therefore your rating, by looking at the various components of your full report. Your full report may contain information reported from financial institutions, utility providers, landlords, and more. This information sums up how you’ve paid bills and used credit.

FICO uses an elaborate algorithm to create a score using your history. This process evaluates how you perform in the following five major categories.

1. Payment History

The first and potentially the most influential factor is your payment history, or how well you pay your bills on time. It makes up 35 percent of your overall score.

It takes up such a large percentage because it’s one of the main things your next lender may want to know. Lenders like seeing a payment history devoid of late payments. But that doesn’t mean a late payment here or there will make lenders avoid you. Your payment history is just one of many facets of your FICO score. You may still find lenders willing to give you a loan, even without a spotless payment history.

Some financial products may impact your payment history, including some online lines of credit. Any financial institution that reports your payment activity to one of the major credit bureaus may impact your payment history.

2. Amounts Owed

The next biggest factor that impacts your credit score is your amounts owed, which makes up 30 percent of your score. Amounts owed generally means two things.

First up is your overall debt. Quite literally, it refers to how much debt you have in your name. But owing money on your different credit accounts doesn’t automatically indicate that you have a low credit score and are a high-risk borrower. The size of your debt may not damage your credit if you stay on top of your bills.

Your credit utilization is the second facet of this factor, and it’s far more significant to your score than the size of your debt. It applies to revolving credit like credit cards and personal lines of credit — not personal loans. These products share more differences than similarities. So if you aren’t sure if a line of credit or a personal loan is the better choice, take some time to learn more about these products before you apply.

Your utilization describes the ratio of the credit you’ve used compared to the total credit you have available. Generally, the less of your available credit you use, the better. This shows lenders you aren’t regularly maxing out credit cards or personal lines of credit.

wallet on a table with American money and credit cards in it

3. Length of Credit History

Although it makes up just 15 percent of your score, length of credit is still an influential factor. It helps FICO improve the accuracy of its predictions about your future borrowing behavior.

It’s all about the amount of information in your report. Reports that show older accounts typically have more information in them, giving FICO more insight into the way you handle debt. As a result, longer histories may have a positive impact on your score.

4. New Credit

At just 10 percent of your FICO score, new credit is less influential than other factors. This shows how often you open new credit accounts. Opening a number of accounts in quick succession may show that you are a higher-risk as a borrower, particularly if you have a short credit history.

Generally, applying for new credit once or twice over the course of a year won’t hurt your credit score much (if at all), but multiple inquiries in a short period of time might. This is why it’s important to try to avoid opening too many accounts in a short amount of time, if you can.

5. Credit Mix

Credit mix refers to the type of accounts you have. FICO prefers to see a variety of loans and lines of credit in your file, provided they’re in good standing.

A varied mix provides more data about your borrowing habits. It gives FICO more information to base their predictions on how you’ll behave when you borrow money in the future.

It’s also worth 10 percent, so it’s not as important as payment history or amounts owed.

close up of a man’s left hand holding a pen over a report with a grey calculator

How Often are FICO Scores Updated?

FICO bases its scores on information provided by your financial institutions, utility providers, landlords, and more. Your score is updated when an inquiry is made into your credit report.

However, different institutions will update a credit bureau on different schedules. Whenever you take out a credit account of any kind, it’s important to understand how that product works and to know whether your payments are being reported to a credit bureau or not.

A credit report is a snapshot of your finances at the time of the pull, but the number you get is never permanent. It may change as soon as a bank or cell phone provider shares information about your accounts.

What is a VantageScore?

FICO may be the most popular scoring model on the market, but it’s not the only way one on the market. VantageScore is an alternative scoring system launched in 2006 by the three major credit agencies. Equifax, Experian, and TransUnion designed it to eliminate inconsistencies between the reports they generated.

What is VantageScore 3.0?

VantageScore 3.0 is an updated version of the original scoring system that arrived on the market in 2013. It came with sweeping changes that made it easier to generate scores for consumers with thin credit histories.

The most recent update is VantageScore 4.0. Although it debuted in 2017, many financial institutions haven’t made the switch and are still using 3.0 to check scores.

What Are the Different VantageScore 3.0 Scores?

The VantageScore 3.0 update also adopted FICO’s scoring range, so your VantageScore will also fall somewhere on a scale of 300 to 850. Although they share the same scale, VantageScore and FICO use different ratings.

Pay close attention to the individual ranges of each rating below. You’ll see there are minor variations from the table above.

Rating Score
Very Poor 300–499
Poor 500–600
Fair 601–660
Good 661–780
Excellent 781–850

How is a VantageScore 3.0 Score Calculated?

VantageScore 3.0 considers the following factors when generating your score.

1. Payment History

This factor functions much like FICO’s. The main difference is its weighting. Payment history takes up a large portion under the VantageScore model at about 40 percent — making paying your bills on time even more important.

2. Age and Type of Credit

The next most influential factor in VantageScore 3.0’s model is the age and type of credit, worth about 21 percent. It’s like a combination of FICO’s length of history and credit mix.

This factor considers how long you’ve had accounts open for and what kinds of accounts you have. Like FICO, VantageScore 3.0 rewards consumers that have a varied mix of longstanding accounts, provided they’re in good standing, as this provides the most amount of information.

3. Percent of Credit Used

Credit utilization gets its own category under this scoring model, and it’s worth about 20 percent.

Generally, a lower credit utilization rate will help contribute to a higher credit score. That means the opposite also is true. A high credit utilization rate, which happens when you use up more of your credit limit, may negatively impact your score.

man holding open a chequebook that says debt in left hand and a pen in his right hand

4. Total Balances/Total Debt

This factor closely mirrors FICO’s amounts owed with one major difference. Since credit utilization is already accounted for in the category above, this factor takes up just about 11 percent. It also only refers to the amount of debt you carry.

VantageScore 3.0 looks at the balances you keep on all accounts, including current and delinquent accounts.

5. Recent Credit

This is VantageScore’s version of new credit, but it’s much less influential at about 5 percent. It also considers the amount of newly opened accounts.

6. Available Credit

Last, making up just about 3 percent of your score, is the credit you have available. This factor has a small impact on your score. It informs financial institutions if you ask for the amount that you need.

What Lenders Use VantageScore?

According to a VantageScore Solutions market study, more than 10.5 billion VantageScores were used between July 2017 and June 2018. Eight out of the ten biggest banks used VantageScores in at least one line of business in 2018.

Despite these impressive numbers, the FICO model is still the most used system. Roughly 90 percent of lenders use FICO when making lending decisions.

FICO Score vs VantageScore

Although FICO and VantageScore both gauge risk, they go about it in slightly different ways. To recap these differences, check below for a brief overview of each scoring model.

Fico Scores:

CompanyFair Isaac Corporation
HistoryOldest, most popular system, established in 1989
Score Range 300–850
Ratings Very poor, fair, good, very good, and exceptional
Factors Payment history (35%), amounts owed (30%), length of credit (15%), credit mix (10%), and new credit (10%)

VantageScore 3.0:

Company Equifax, Experian, and TransUnion
History Updated to VantageScore 4.0, but most lenders still use version 3.0, established in 2013
Score Range 300–850
Ratings Very poor, poor, fair, good, and excellent
Factors Payment history (about 40%), age and type of credit (about 21%), percent of credit used (about 20%), and total balance/total debt (about 11%), recent credit (about 5%), and credit available (about 3%)

close up of laptop and phone resting on table where a woman is writing in a notebook with a pencil

Hit the Books of Your Scoring Model

Understanding your credit score may be challenging if you don’t know how it’s generated. But that doesn’t mean there isn’t a rhyme and reason to your report. It and your credit score are the products of rules established by FICO and VantageScore.

Now that you know how these scoring models calculate credit, take what you’ve learned today and apply it to your finances. Focus on the factors that have the biggest impact on your score and see how you may improve paying bills on time and reducing your credit utilization.

Disclaimer: This article provides general information only and does not constitute financial, legal, or other professional advice. For full details, see CreditFresh’s Terms of Use.

Connect

facebook