What is my credit score?
Your credit score is a numeric representation of your creditworthiness. Three large credit agencies, Experian, TransUnion and Equifax all came together to make the FICO score (Fair Isaac Corporation but who is counting?). This is a generally agreed upon scale of 300-850 that takes into account:
- Payment History (35%)
- Amount Owed (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Credit (10%)
Changes are coming to this (slightly) and another score: the VantageScore. This is actually made by the same credit agencies but just has a more hip name. The formulation should be more consistent across all agencies, so you don't have the annoying problem of the score varying wildly between agencies.
The VantageScore (3.0) is a newer credit score designed to solve some problems with the archaic dinosaur that the FICO score has become. The VantageScore takes these things into account, in this order:
- Payment History
- Age and Type of credit
- Credit Limit Used
- Total Balance
- Recent Behavior (New Credit)
- Available Credit
As you can see, the priorities are a little bit different. One big thing is still the same, the biggest factor across both credit scores has been, and presumably will remain your payment history. The best way to tell if you are a creditworthy is to see if you have paid your old bills on time.
So what are the changes?
With VantageScore 4.0 even more changes are coming. 4.0 wants to be a predictive score, not a stodgy old descriptive score of the past. 4.0 will take into account trends in your payment history. If your balances are declining, that means you are paying off debt. With the new formulation, this will appear as better than before.
It is important to note that it appears from the priority lists that FICO cares more about credit utilization (that is, your current balance compared to the original balance or total credit limit). The thing with FICO is that they only take a current snapshot of that utilization. If you have used $5,000 of a $10,000 credit limit, FICO doesn't care what you used the month before, and doesn't try to guess where you are going. With VantageScore, if you are using $5,000 of a $10,000 limit, they will check to see if that is less or more than the last few months, and make their decisions accordingly.
With both your FICO and VantageScore credit scores, tax liens and medical debt will play less of a role. This change was bought about by a lawsuit in 2015 but the specifics are still working into the system. With VantageScore, medical debt isn't even considered for the first six months, as they understand that insurance payments can take some time to show up. Additionally, medical and tax debt will have less negative impact on the score as it is not incurred in the same way that other debts are incurred.
VantageScores are calculated faster than FICO scores. The old scores needed at least 6 months of credit data from you before generating a score. This made it a lengthy (6 months long!) period of uncertainty before you knew how your creditworthiness was viewed. Only 1 month of credit history is required for you to earn a VantageScore.
Does my FICO still matter?
Yes. plenty of places still look at your FICO score. It appears that the credit agencies are pushing hard to make the new score more ubiquitous. If you have applied for credit recently, your VantageScore may well have come into play.
Currently, your FICO score is still what is required for most mortgages, but VantageScore is working to change that. This should be a good thing for people who are working to establish their credit, as VantageScore moves quicker to give you a score. This should also be good for people trying to improve their credit, as the trend that develops as they pay down other debt will be taken into account.
The main thing that matters, even with the changes, is that you pay your debts on time. Both scores in all of their iterations place the most weight on your payment history.