When you are repairing your credit, one of the important things to understand is how your credit score is calculated. There are two main credit rating systems calculating your score, the Fair Isaac Corporation’s FICO score and the VantageScore. I want to make sure that you understand each of them, so this week, we are discussing the VantageScore.
When I first started working on repairing my credit and raising my credit score, it was because I wanted to buy a home. Let’s just say that my credit score was far from where it needed to be to be approved for a home loan. In full disclosure, my credit score was a 411, nearly as low as it could get. What I didn’t understand, was how my credit score was calculated. And had I understood that, it may not have taken me as long to get my score high enough to obtain my goal.
Just over 10 years ago, the VantageScore credit rating was introduced as a new scoring system that shares data from the three major credit bureaus (Experian, Equifax, and TransUnion). The credit bureaus released it to be a direct challenge to the FICO score, which provides the most commonly used credit scoring for mortgage lenders.
Since the three credit bureaus released the VantageScore rating system, the major players in the industry have claimed that they “Will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply.”
In the beginning, the VantageScore rating scale was from 501 to 990 and also gave you a grade rating of A, B, C, D or F. Since 2006, the three major bureaus have released a total of three versions of the VantageScore. The newest version released in 2013, known as VantageScore 3.0 now rates on the same scale as the FICO score, which is from 300 to 850.
The whole idea behind the VantageScore, is that all three credit reporting agencies use the same formula to calculate the credit score. The problem with this is that if you were to log into one of the sites to obtain your credit report and score, you would still see different scores among the three bureaus. This is because of the different data the three agencies have on the credit reports.
Understanding where the VantageScore comes from is important, but even more important is how the VantageScore is calculated. The formula itself hasn’t been released, but the team over at VantageScore has released the categories they use as well as the weight of each category. Understanding each of these categories can give you some insight on which areas of your credit report you need to focus on.
- Payment History: This category is weighted the heaviest. Just remember, the fewer the late payments you have, the better. Your recent late payments will have a greater impact on your score than a very old bankruptcy with a perfect credit since.
- % of Credit Limit Used: This is the proportion of your total credit amount used divided by how much you own on all your accounts. This is also known as “Utilization” of your credit. The rating scale likes you to have low balances across several cards than the same balance concentrated on just a few cards closer to your maximum credit limit. Keep your credit utilization around 30% of your total credit available.
- Balances: This is what your total debt is; being late or delinquent is weighed more severely than when you are current.
- Age and Type of Credit: The longer your accounts have been open the better it is for the credit score. BE CAREFUL WHEN CLOSING ACCOUNTS! Opening up new accounts and closing accounts that have been opened for a long period of time can bring your score down quickly. If you have a credit card that has been open for 15 years, and another credit card that is two years old, your credit is viewed as 15 years old. If you close your account with your credit card that had been opened for 15 years, your credit history is now only two years old and the credit rating systems view you as more of a risk. When it comes to types of credit, a finance company scores lower than bank or department store accounts.
- Recent Credit: Multiple inquiries can be a risk if you have applied for multiple lines of credit or other accounts are close to being maxed out.
- Available Credit: This tells us how much credit can be accessed.
Now that you have an understanding how your VantageScore is calculated, get your credit report and analyze each of these categories as to how they may be affecting your score. Once you have analyzed your report, put together your plan as to how you can begin repairing your credit. This could be paying down your credit card balances, making sure you are making your payments on time, or deciding not to cancel your credit card.
Question: After analyzing your credit report, what area do you need to focus on to help your credit score increase? You can leave a comment by clicking here.