What are the Different Types of Credit Scores and How Do They Work?

When you see an advertisement or service offering to show you your credit score, did you know that it might not necessarily be the same score that the major banks and lenders use? Here’s what you need to know about the different types of credit scores and how they should be used.

What is a credit score?

A credit score is a measurement of creditworthiness as a three-digit number between 300 and 850. The higher the number, the more reliable you’re perceived to be at paying back the money you’ve borrowed. This means you may have a better chance of being approved for new credit lines.

How is my credit score measured?

In the U.S., credit scores are typically reported using one of two types of models.

• FICO Score: A FICO Score is what most people think of when they talk about their credit score. FICO stands for the “Fair, Isaac and Company” (which is now called the Fair Isaac Corporation) and was developed in 1989 as a way for creditors to better evaluate their applicants. Today, FICO Scores are used by over 90 percent of the top lenders and have become the dominant metric in many lending decisions.
• VantageScore: A VantageScore is an alternative to the FICO model that was developed in 2006 as a collaboration between the three major credit bureaus: Equifax, Experian, and TransUnion. Generally, when a credit service or your credit card shows you your credit score, what you’re actually seeing is your VantageScore.

FICO Score vs. VantageScore: What’s the difference?

In many ways, a VantageScore is very similar to a FICO Score. They use the same scale and look at the same criteria from your credit history. However, those inputs are weighed differently, and so there is almost always a difference between your FICO and VantageScore. This can sometimes lead to confusion or misinterpretation. For example, the point where your VantageScore increases from “Fair” to “Good” is 661. However, with your FICO Score, you’d need a 670 to have a “Good” score.

Since lenders predominately use the FICO model, you’ll always want to make sure you know your true FICO Score before applying for a new credit line. However, your VantageScore can serve as a good ballpark indicator of what your FICO Score might be.

How to improve your credit score

No matter which credit score you prefer to use, the same good daily habits will help make them as high as they can go. Here’s what you need to do to be as appealing as possible to creditors:

• Always pay your bills on time.Use autopay to make this process seamless.
• Don’t use too much of your credit. Never go above 30 percent of your credit limit.
• Don’t carry a balance.This will hurt your credit utilization and incur interest making it harder to make your scheduled payments.
• Keep old cards open (as long as there’s no annual fee).The older your credit lines, the better your rating.
• Limit your credit card or loan applications.Five or more in one year reflects poorly.
• Check your credit reports regularly for errors. You’re allowed at least three free downloads per year, one from each of the three major credit bureaus.

The bottom line

Your credit score shows your creditworthiness. Many lenders use FICO Scores to determine this, but VantageScore is another good way to check how you’re doing. Practice good credit habits daily such as paying your bills on time, in full, and keeping the usage minimal.