Key Takeaways
- No two credit scores are the same, even if they belong to the same person. That’s because the financial industry uses different scoring models for different purposes.
- The credit score that matters the most is the score that your potential lender is using to determine your creditworthiness. To find out which one they use, just ask them.
- FICO and VantageScore are most commonly used by lenders, and there are different versions of each.
- Focus on improving the range your credit score is in (poor, good, very good, excellent) rather than the number itself.
Your credit score impacts whether you’ll get credit. Having a high score means you’re more likely to be approved, and you’ll also get better rates than someone with a lower score. But you may notice that your scores differ, with one report saying you have a 685 and another saying your score is 715. Confusing, right? That’s because not all credit scores are created equal. They use different models, and not every lender uses the same one.
Why Credit Scores Differ
Your credit score is a three-digit number lenders use to determine your creditworthiness. The score is based on a few factors, including the length of your credit history, your payment history, your outstanding balances, the number of open and new accounts, lender inquiries, and whether there are any negative remarks against you, such as liens, judgments, and bankruptcies.
Several factors determine your score. The three different credit bureaus (Equifax, Experian, and TransUnion) collect information about you and use it to create your credit report.
Important
Not every lender reports to each agency, which can affect how your credit score is calculated and reported.
FICO and VantageScore, the most commonly used models in the industry, use different systems to create your score. FICO scores range from 580 to 800+, while VantageScores range from 300 to 850. Each weighs credit factors differently, as you can see here.
How FICO Scores Are Calculated
Category
Weighting
Payment History
35%
Amounts Owed
30%
Length of Credit History
15%
Credit Mix
10%
New Credit
10%
How VantageScores 3.0 Is Calculated
Category
Weighting
Payment History
40%
Depth of Credit*
21%
Credit Utilization
20%
Balances
11%
Recent Credit
5%
Available Credit
3%
*Depth of credit is defined as a mix of the age and types of accounts in your report.
There are also different versions of FICO and VantageScore, and each is calculated a little differently. Aside from the traditional FICO score, there are variants, including the FICO Auto Score. VantageScore’s models include VantageScore 3.0 and the more advanced VantageScore 4.0 and VantageScore 5.0.
Your score is constantly changing because lenders regularly provide new information about you to the credit bureaus. For example, you may have paid off all of your credit card balances last month, boosting your score. But it could drop if you spend a lot more this month and carry a balance.
Note
Insurance companies use credit scores to understand your coverage risk and to determine your premiums.
Which Credit Score Actually Matters?
There are several different credit scoring models, including FICO scores, VantageScores, CreditXpert, and Experian’s National Equivalency Score:
- About 90% of major lenders rely on FICO scores to make their decisions. Mortgage lenders typically use FICO’s 2, 4, and 5 scores, while some auto and credit card lenders use FICO Auto Scores and FICO Bankcard Scores, respectively.
- More lenders are using VantageScore these days. The Federal Housing Finance Agency (FHFA) adopted the use of VantageScore 4.0 for all Fannie Mae- and Freddie Mac-backed mortgages. VantageScore 5.0 is being used by lenders in the unsecured lending market.
- Not as widely known, CreditXpert is used in the mortgage industry by over 60,000 professionals.
- Experian’s National Equivalency Score is designed to help consumers understand and track their credit scores.
What matters most is the scoring model your potential lender uses, because that is what determines the score that the lender looks at.
Important
Try to regularly review your history with each credit bureau. Not every lender reports to all three, and lenders may use different reports to make their decisions. Stay on top of your reports.
It’s also important to think of your credit score in the context of a range, rather than targ the number itself. For example, it may not matter to a lender if your FICO score is 400 or 450. What matters is that your score is in the poor range. You would do well to concentrate on increasing your range from poor to good—that’s what you should focus on.
Tip
Ask your potential lender which scoring model they use to make their lending decisions before you apply.
How to Improve Your Credit Score
Here’s how you can raise your score:
- Make your payments on time.
- Keep your credit utilization low.
- Maintain a diverse mix of credit.
- Report any errors or fraudulent activity on your report immediately to the credit bureau and lender. You can also file disputes with the credit bureau if you notice discrepancies, such as on-time payments that were reported as being late.
Beyond that, it’s important to monitor your credit score regularly. You can pull your free credit report from each of the three agencies from AnnualCreditReport.com every week.
