Understanding the Different Types of Credit Scores

Understanding your credit score is crucial because it helps lenders determine your likelihood of repaying a loan. By familiarizing yourself with the different types of credit scores and how they work, you can improve your chances of securing a loan with favorable rates and terms. 

What is a credit score? 

A credit score is a three-digit number that lenders use to assess how risky it may be to lend you money. It considers your financial history and predicts your ability to repay debt. 

While a high credit score indicates you may be responsible with money, a low credit score suggests that you could be a risky borrower. The higher your credit score, the easier it typically is to get approved for the loans you want. 

Most popular types of credit scores 

There are different types of credit scores, including: 

FICO scores 

FICO scores were created by the Fair Isaac Corporation and are considered the gold standard of credit scores. FICO scores range from 300 to 850, with 300 being the worst and 850 being the best. FICO considers five factors when calculating your credit score: 

• Payment history 
• Credit utilization 
• Length of credit history 
• New credit 
• Credit mix 

Additionally, there are different FICO scores depending on the type of loan you’re applying for. For example, if you’re applying for a car loan, the lender will check your FICO Auto Score, whereas if you’re applying for a credit card, they will check your FICO Bankcard Score. 

VantageScore 

Although not as widely recognized as FICO, VantageScore is the second primary type of credit score. The VantageScore formula is similar to the FICO score formula, utilizing many of the same scoring factors. It also has the same scoring system, ranging from 300 to 850. 

The difference between FICO and VantageScore lies in the emphasis placed on specific factors. VantageScore primarily considers your credit utilization ratio and credit card balances, while FICO places the greatest importance on your payment history. 

Other types of credit scores 

While FICO and VantageScore are the most common credit score models, they aren’t the only ones. Car insurance companies rely on a standalone credit score that considers your auto claims history to calculate your premiums. Home insurance is also based on a unique credit score that focuses on your home and neighborhood. 

Additionally, several major credit unions, including Equifax, TransUnion, and Mint, use their own credit scores. While their scoring models and formats are similar to FICO and VantageScore, they have subtle differences. 

How your credit score is determined 

Your credit score is determined using several different factors, the primary ones being payment history, credit utilization, and length of credit history. 

• Payment history is your record of on-time or missed payments on outstanding debts and loans. This includes payments on credit cards, your mortgage, car loans, student loans, and more. It can also include payments on rent and your monthly utility bills. Having a good history of on-time payments is crucial if you want a good credit score. 
• Credit utilization refers to how much of your available credit you use and typically applies to credit cards and Lines of Credit. You can calculate your credit utilization ratio by dividing your current balances by your total credit limits, then multiply by 100. The lower your credit utilization ratio, the better the impact your credit score. 
• Length of credit history refers to how long your credit accounts have been open. It also includes how long you’ve been paying off your loans and debts. Since it’s easier to maintain good credit for a short period, having a long credit history will boost your credit score because it shows long-term reliability. 

Now, let's examine the scoring systems of FICO and VantageScore to understand better how each of these factors affects your credit score. 

FICO score calculation 

FICO credit scores are based on payment history, amounts owed, length of credit history, new credit, and credit mix. Here’s a percentage breakdown of how important each factor is. 

• Payment history - 35%. Your payment history indicates how responsible you are at repaying debts and loans on time. 
• Amounts owed - 30%. The more money you owe, the more likely you might fail to make on-time payments. 
• Length of credit history - 15%. The longer your credit history, the longer your track record of being responsible with your money and managing your debts. 
• New credit - 10%. Opening too many new credit accounts at the same time is a red flag for lenders. It could indicate that you’re maxing out your credit accounts or tend to take on a lot of debt. 
• Credit mix - 10%. Having a mix of different types of credit accounts is a good thing for your credit score. That includes different types of personal loans, business loans, credit accounts, and more. 

While this is the general rule for calculating FICO scores, there may be exceptions. For instance, if you don’t have a long credit history, your score might be calculated differently than someone with a lengthy one. As such, it’s vital to remain in good standing in as many categories as possible. 

VantageScore calculation 

VantageScore credit scores are calculated similarly to FICO scores, but with several small differences. Rather than placing a percentage on each scoring category, VantageScore simply says how influential they are. 

• Payment history - highly influential. This category is just as important as with a FICO score. 
• Credit utilization - highly influential. Credit utilization is the same as amounts owed for a FICO score and is of equal importance. 
• Credit history and length - highly influential. Your credit history and length are more important to your VantageScore than your FICO score. 
• Amounts owed - slightly influential. The amount you owe on each credit account or loan balance isn’t a factor for FICO scores. With VantageScore, however, it has a slight impact on your credit score. 
• Recent credit activity - less influential. Recent credit activity is the same as FICO’s “new credit” category and is of similar importance. 
• Total available credit - less influential. Showing that you don’t use up all the credit you have available helps your credit utilization ratio and improves your credit score. 

As with FICO, the best way to ensure a solid credit score is to be proficient in each of VantageScore’s categories. 

➢RELATED: What Affects Your Credit Score?

How to check your credit score 

There are several ways to check your credit score for free. The best way is to visit AnnualCreditReport.com and pull your credit reports from Experian, Equifax, and TransUnion once a year. You can also check your FICO score in your credit card account or your VantageScore through Experian. 

➢RELATED: What Is the Average Credit Score by Age?

Tips to boost your credit score 

Regardless of which of the three types of credit scores you’re trying to improve, here are some credit-boosting tips and tricks to aid you in your efforts: 

Pay your bills on time 

Paying your bills on time is the best way to quickly improve your credit score. That includes your credit card balances, student loans, rent, mortgage, utilities, and anything else you pay monthly. 

Pay down your debt 

Paying down your debt shows that you’re serious about gaining financial freedom. As such, potential lenders will see you as someone who doesn’t want to take on new debt you can’t afford. 

Protect your credit utilization ratio 

Maintaining a low credit utilization ratio shows discipline and restraint. It also shows that you don’t take on more debt than you need to or can afford. FICO and VantageScore both see this as a good sign and will reward your credit score. 

Be mindful of your credit activity 

If your credit score is on the fritz, you should think twice about opening or closing credit accounts. According to Experian, it’s a good idea to wait at least six months between opening new credit accounts or closing old ones. 

Pay attention to your credit accounts 

Regularly check your credit report for errors. Reporting and correcting mistakes promptly can help maintain your credit score. 

Diversify your credit 

Credit diversity is an easy way to improve your credit score. Just don’t open too many new accounts at once! 

Request higher credit limits 

Ask for higher credit limits to improve your credit utilization ratio, even if you don’t plan to use the extra credit. 

You don’t need a good credit score to get an Advance America loan 

Even if you have poor credit or fair credit, you may still get approved for an Advance America loan. We offer a variety of online loans for less-than-perfect credit, including Payday Loans, Installment Loans, and Lines of Credit. 

Visit your nearest Advance America store or start your online application now.