Understanding Credit Scoring Models: FICO, Vantage Score & Credit Scores Effects

Knowing your credit score is vital to know where you stand on payments, debt-to-credit ratio, open lines of credit, and what you need to improve on.

If you have a low credit score, it is possible to fix it, but first, you have to know what all the terms are. We will discuss your FICO score, Vantage score, and the effects of your credit scores.

F.I.C.O. Score

This score is a credit score that was originally introduced by a company called the Fair Issac Corporation. This score focuses on five categories: payment history, the current level of indebtedness, types of credit used, and the length of credit history and new credit accounts. This credit score ranges from 300 to 850, with a good credit level being 650 and above. These score percentages break down into the five groups that were mentioned earlier, and they are:

  • Payment history: This history keeps track to see if you make your payments on time. Your credit report will show if payments were 30, 60, 90, or 120 days late, and this counts for 35 percent of your credit score.
  • Accounts Owed: This category shows the amount of money you owe to various agencies. 30 percent of your credit score is based on how many accounts you owe money on against how many lines of credit you have open.
  • The total length of your credit history:  The longer you have a credit history, the better your score is. Your score is calculated by how long your oldest account has been open and averages it with the ages of the newest account open. This percentage makes up 15 percent of your credit score.
  • Credit mix: For you to get a credit score, you have to have a good mix of retail, credit, and installment loans. This will make up 10 percent of your score.
  • New credit: New credit means any recently opened accounts that are currently on your credit score. This percentage makes up the final 10 percent of your credit score.

Your Second Score

This score is a credit scoring model that was formed in 2006 with the three main credit companies; Experian, TransUnion, and Equifax. Its calculations are highly dependent on your payment history, keeping a low debt ratio in comparison to your clear credit, the age of your credit accounts, and the number of credit inquiries on your report. It can calculate credit scores on people who have thin credit histories, and this sets it apart from regular credit models.

Side Effects of Low Credit Scores

There are several negative side effects to having a low or no credit rating. Lenders view you as a higher risk of defaulting on loans or credit card payments, and you can be subjected to penalties and setbacks because of this. A few of the adverse side effects are:

  • Higher interest rates: Lenders view you as a risk for nonpayment, and they make you pay for it by charging higher interest rates. Over the life of your loan, you’ll end up paying far more in interest than you normally would.
  • Credit and loan denials: If creditors or lenders see you have a low score, they may refuse to lend to you at all. You may see your loan and credit card applications being denied.
  • Security deposits on utilities: Utility companies like electric, cable, and phones check your credit score as part of its implementation process. If you have bad credit, you may find yourself having to pay a deposit to get these services in your name, even if you’ve always been on time with your payments.
  • Higher insurance premiums: Insurance companies check your credit history and will charge you higher premiums if they see a lot of dings on your report. Their argument is people with lower credit scores mean there will be a larger number of claims filed, even if you have never filed one or filed very few.
  • Difficulty when renting a house or apartment: Landlords check credit for new applicants to see if they have a history of paying their bills on time, and to see if they have any evictions on their credit reports. You can be denied a house or an apartment rental because of poor credit.

Similar Articles