Two scoring models comprise the vast majority of those used: FICO Score and VantageScore. You are likely more familiar with the FICO Score, given that it has been in majority use since 1989. VantageScore, on the other hand, debuted in just 2006. Though FICO Scores have the lion’s share of usage by lenders, the VantageScore is still an important player in the credit arena.
In this article, we’ll hone in on the VantageScore 3.0. If you’d like to learn more about credit scores, including FICO Scores and how they compare to the VantageScore, see Credit Scores 101.
History of VantageScore
In 2006, the three major credit reporting bureaus—TransUnion, Equifax, and Experian—teamed up to create an algorithm for a score that would be more consistent between them and have improved credit risk prediction capability. It now comprises about 10% of the body of scores utilized in lending decisions, while the FICO Score makes up 90%, per MyFICO.
VantageScore has had three versions thus far: 1.0, which came out in 2006; 2.0, released in 2010; and 3.0, released in 2013. VantageScore 4.0 will be made available to lenders and commercial clients in fall 2017, and to consumers in 2018.
Advantages of VantageScore 3.0
The hallmark of VantageScore 3.0 (the latest version currently in action) is its ability to score 30–35 million formerly unscoreable consumers. Its updates include a switch from a range of 501–990 to 300–850 for greater ease in comparability to FICO Scores; looking 24 months into the past at individuals’ credit history (including utilities, rental, and phone service payments) to expand access to consumers with little or no credit data; and lifted penalties to those making late payments in the aftermath of a natural disaster.
The minimum scoring criteria required for a VantageScore is simple: a single qualified trade line (i.e., a credit account record that has been submitted to a credit reporting agency) and no indication of deceased on an one’s credit report.
VantageScore 3.0 Breakdown
The VantageScore is proprietary. While VantageScore Solutions doesn’t divulge their exact metrics for scoring, they provide an approximation of the algorithm utilized by VantageScore 3.0:
• 40% payment history
• 21% credit age and mix
• 20% credit utilization
• 11% balances (both current and delinquent)
• 5% recent credit
• 3% available credit
Payment History
Constituting a whopping 40% of the makeup of VantageScore 3.0, exercising consistent punctuality and dependability when it comes to submitting at least the minimum payment on time is the most effective way to score highly.
However, if you slip up once and miss a credit payment by up to 29 days, don’t fret; while you may be slapped with a late payment fee (which stands a good chance of being forgiven if your account has been in good standing otherwise), credit bureaus aren’t notified of late payments until overdue by 30 days.
Credit Utilization
Credit utilization, the proportion of your credit limit being used, makes up 20% of the VantageScore 3.0.
The credit utilization ratio is considered an important indicator in the model of risk, because high can mean overextended. Normally, the ratio is calculated as the ratio of your balance total across all cards to your limit total across all cards (called aggregate utilization), but some scoring models penalize you for having a utilization higher than 30% for any single card (line item utilization), so it’s better to keep tabs on how high it is at all times and pay it off once it approaches the 30% mark.
As an example calculation of your credit utilization ratio, if your credit card balance was $100 while your card’s limit was $1,000, you’d simply divide $100 by $1,000, then multiply the resultant 0.1 by 100 (or move the decimal place two spaces to the right) to convert it into a percentage, ending up with 10%.
You can request a credit limit increase from your issuer to reduce your pressure to keep your utilization ratio down, though keep in mind that it could result in a hard inquiry. Another idea to alleviate the worry of a creeping balance is to get into the habit of making a payment twice per month, halving the time it has to accrue.
While we’re on the topic of credit utilization, another thing to keep in mind is the impact of closing a credit card. If you are going to do so, you should make sure you aren’t carrying a balance on any other credit cards you may have, or at least ensure that the credit usage on the cards you’ll be keeping open is at below 30%; the closure of that card could cause your credit utilization ratio to spike.
Total Balances
Total credit balances (both current and delinquent) make up 11% of VantageScore 3.0’s scoring algorithm.
Credit Age and Mix
VantageScore 3.0 consolidates length of credit history and credit mix into a single category worth 21%.
Having a rich, extensive credit history is valuable indicator of creditworthiness to lenders.
This is one reason it’s generally wise to keep accounts, especially those with positive payment history, open.
Note that accounts with positive history remain on your credit report for 10 years, while those with negative marks fall off after seven years.
As for credit mix, ideally, you should have both revolving and installment loan/credit accounts.
Recent Credit
VantageScore 3.0 is made up of 5% recent credit. Recent credit is comprised of newly opened credit accounts and hard inquiries into your credit report.
While hard inquiries require your consent, soft inquiries don’t, as they give lenders just a snapshot of your credit. Lenders perform soft inquiries to identify the most worthwhile recipients for their preapproved credit offers.
Generally, lenders perform a soft credit inquiry/”pull” to determine initial rates, but if you choose to apply for a loan, a hard inquiry into your credit history is performed. While soft credit pulls don’t affect your credit, hard credit inquiries may decrease your FICO Score score by up to five points, and your VantageScore by 10–20 points, according to Heather Battison, Vice President of Consumer Communications at TransUnion. Given that applying for new lines of credit can temporarily lower your credit scores, it should be kept to a minimum—once per seven months is a good rule of thumb.
While they appear on your credit report for two years, they only impact your score for one year.
This factor is also important to keep in mind when applying to multiple lenders to compare interest rates. VantageScore Solutions employs a technique to identify when you’re rate shopping, using scoring formulas that consolidate several loan inquiries performed during a certain time frame into one. It rolls all hard inquiries within a 14-day window into one, according to The Washington Post’s Michelle Singletary, so it’s best to keep rate shopping within the confines of a two-week period to minimize damage to your VantageScore.
Available Credit
VantageScore penalizes you for having many credit lines, though this factor only accounts for about 3% of the score, so it isn’t something you should be very concerned about. It’s generally better to keep credit cards open (for the sake of a healthy credit utilization ratio and keeping positive account history on your report), provided they don’t have an annual fee.
Credit Tiers
VantageScore 3.0 has four credit tier score ranges:
• Superprime: 781–850
• Prime: 661–780
• Near prime: 601–660
• Subprime: 300–600
How to View Your VantageScore
See How to Check Your Credit Score for Free for a list of sites that provide your VantageScore 3.0 (as well as some provide your FICO Score and credit report) free of charge.
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