While the FICO score remains the most popular credit scoring model in the U.S., VantageScore is quickly growing as a favorite amongst lenders.
Developed jointly by the three major credit bureaus (Experian, Equifax, and TransUnion), VantageScore was used more than 12 billion times by lenders from mid-2018 to mid-2019.
The original version was created in 2006. The current VantageScore 3.0 now reflects the most up-to-date trends in credit scoring. So don’t just assume your next lender will automatically request your FICO scores. Brush up on the details of VantageScore 3.0 to understand how it works and why it matters.
Why Credit Scores Matter
Like other credit scoring models, VantageScore analyzes the information in your personal credit report to assign you a numerical grade based on your creditworthiness.
Whenever you apply for a loan or even a credit card, the lender looks at your credit report and your credit score. It gives them an idea of how likely you are to repay the loan or card balance.
If you have a high credit score, lenders will offer you the best loan terms and conditions. You will most likely qualify for a low interest rate, higher loan amount, and a longer repayment period. In addition, you’ll have a lot more flexibility with the type of loan or credit card you can get when your credit score is strong.
If you don’t have good credit scores, you might not even get approved for a loan or credit card, depending on the lender and your actual scores. Even if you do qualify for a loan, you’ll pay a lot more in interest. You also probably won’t be able to borrow as much as someone with a higher score.
Just because you’re not planning on applying for a loan anytime soon doesn’t mean your credit score can’t affect you. Both landlords and employers can request access to your credit history to find out how trustworthy you’d be as a tenant or employee.
How VantageScore 3.0 Works
The new VantageScore 3.0 range follows FICO’s scoring range because it’s the one consumers are most familiar with. Instead of scoring consumers on the original scale of 501 to 990, the new credit scoring model now uses a credit score range of 300 to 850, with 300 representing the lowest score and 850 representing the highest.
The change in VantageScore credit score values also helps lenders who might have an automated system already in place based on the FICO scoring range.
To determine a credit score using VantageScore 3.0, six categories are taken into consideration. The weight of each category may vary for each individual, but the hierarchy of importance remains constant. This system allows you to see what factors are affecting your current credit score.
How VantageScore 3.0 Is Calculated
Like other credit scores, VantageScore 3.0 is calculated based on information in a consumer’s credit report. However, it uses a different scoring algorithm and weighs certain factors differently than other credit scores. Here is an explanation of each factor in order of importance.
Like your FICO score, VantageScore 3.0 is primarily concerned with how you’ve handled your past payments. After all, past behavior is one of the most reliable ways to determine future behavior, at least in the eyes of major credit bureaus and lenders.
Your credit scores suffer when you have late payments listed on your credit report. Unfortunately, you also hurt your chances of getting approved for financing further down the road.
Credit Age and Type
The next most important category weighs how long you’ve had credit and what kind of credit you have. The older your credit accounts are, the better it is for your credit scores.
You’ll also score better with VantageScore if you have different types of credit. This is also known as your “credit mix.” It’s ideal to have a mix of revolving credit (like credit cards) in addition to installment loans.
This is another major factor in determining your VantageScore. Credit utilization refers to how much credit you’ve used compared to your overall limit. You won’t score well in this category if you’re close to maxing out your credit cards.
Total Balance of Debt
VantageScore considers the ratio of debt to available credit. The credit scoring model also looks at how much debt you carry overall. If you’re trying to increase your credit scores, paying down your debt is a great place to start because it helps you in both of these areas.
Inquiries and Recent Behavior
VantageScore and FICO both evaluate how many recent hard inquiries you’ve had on your credit report and how many new lines of credit you’ve opened up. Having many inquiries and new credit cards can raise a red flag that you’re in a tight financial spot.
Last but not least, VantageScore looks at how much credit you’re approved for. This is the least impactful category. However, a quick way to raise your credit score by a few points would be to ask one or more of your current creditors for a credit limit increase. As long as increasing your credit limit doesn’t tempt you to spend that much, it will lower your credit utilization ratio.
Who Uses VantageScore?
VantageScore is used by over 3,000 lenders and financial institutions to evaluate the creditworthiness of potential borrowers. In addition to lenders, VantageScore is also used by landlords, insurers, and other organizations that rely on credit scores to make informed decisions about financial risk.
VantageScore is used by the following lenders:
- American Express
- Capital One
- Credit Karma
- Lending Tree
- Synchrony Bank
Who VantageScore Helps
VantageScore 3.0 considers more information than its competitor FICO. This helps as many as 30 million individuals who would otherwise be deemed as having too little credit.
It looks at broader credit data points, including a full 24 months of credit activity, and sometimes even longer. This helps people who don’t frequently use their credit cards and consequently have “thin” credit.
It’s not that they necessarily have bad credit. They simply might not utilize their credit often enough to have a comprehensive history. VantageScore 3.0 is particularly helpful to potential borrowers in the process of building (or rebuilding) their credit.
With VantageScore, collection accounts that have been paid in full do not hurt your credit. They’ll still stay on your credit report for up to seven years just as they always have. However, they won’t be included when actually calculating your VantageScore credit scores.
VantageScore also ignores any item in collections under $250, regardless of whether they are paid or not. These new guidelines are a huge help to people trying to recover from past financial issues.
What is my VantageScore?
There are a few different ways you can obtain your VantageScore:
- Check with your credit card issuer: Some credit card issuers provide your VantageScore to you as a part of your monthly statement or online account summary.
- Purchase a copy of your VantageScore: You can purchase a copy of your VantageScore directly from the VantageScore website or from one of the credit bureaus.
- Check with your lender: If you have recently applied for a loan or other type of credit, your lender may have provided you with your VantageScore as part of the credit application process.
Tips for Increasing Your VantageScore
Whether your credit score is exactly where you want it to be or you have some work to do, there are a few effective ways to either maintain or raise your VantageScore.
Pay Bills Regularly
As you can tell by the credit scoring categories, your first step is to pay all of your bills on time each month. Even if a certain creditor doesn’t report your on-time payments, they could very likely report your late ones. Anything paid 30 days late or more can cause a huge drop in your credit score, so stay on top of those bills each month.
Lower Your Credit Utilization
Aim to owe no more than 30% of your credit limits to avoid lowering your credit score. You can use that number as your initial goal when paying down your debt. It’s a much more manageable number than zero and can give you the confidence you need to keep working on debt elimination.
Minimize Credit Inquiries
A single inquiry only lowers your VantageScore by a few points, but those can really start to add up if you’ve applied for multiple loans or credit cards. Take it easy and only apply for credit when you really need it. When possible, ask for a pre-approval to compare offers without having a hard inquiry performed on your credit report.
Mix Up Your Credit
Credit cards might be the most popular type of credit available, but it shouldn’t be the only kind on your credit report. Installment loans are just as important, whether it’s a mortgage, personal loan, or car loan.
Obviously, you shouldn’t take on unnecessary debt just for the sake of diversifying your credit mix. However, you could help your credit score by making payments on a loan rather than just a credit card.
Keep Old Accounts Open
Since the length of your credit history is part of your VantageScore, it’s helpful to keep old accounts open even if you don’t use them anymore.
They won’t drop off your credit report immediately, but they do disappear ten years after being closed. When that happens, it can cause your average account age to dramatically drop, and your credit score will drop, too.
VantageScore carries several unique features that set it apart from the more traditional FICO score. Not every difference is huge. But, it does open up a lot of opportunities to consumers who either don’t have an extensive credit history or are trying to put a less-than-perfect financial past behind them.
Now that you know how VantageScore 3.0 works, you can work to improve yours as lenders continue to use this credit scoring model more frequently in the loan and credit approval process.