Learn all about how the types of credit scoring work!
There are many types of credit scoring models and credit score categories. You should know that the credit score types depend on the credit score model we’re dealing with. So, how many credit score models are there?
There might be quite a few, but in order to get more insight into your score, you will need to comprehend how each one operates. And in this post, we’ll show you just that! We are here to help you learn about your score and improve your financial life!
All credit scores are designed to simplify the process by which potential lenders (and other creditors, such as proprietors and utility suppliers) assess the risk involved in extending credit to you.
If your credit rating is good, your creditors won’t have to worry as much that you won’t pay your bills on time. For this reason, lower ratings indicate a greater level of risk. And you can keep reading to learn about how your score is calculated and about the credit score models and categories!
How many credit score types exist?
If you have ever thought about having a good credit score, you’ve probably researched the credit score types. There is much information online about the credit score categories. But the truth is that the categories vary depending on the credit bureau.
For the FICO® Score, the categories are basically:
- Poor (300 to 579);
- Fair (580 to 669);
- Good (670 to 739);
- Very Good (740 to 799);
- Excellent (800 to 850).
However, you must know that the percentages of people with higher credit scores are pretty high. For example, much data shows that, in the U.S., only 16% of people have a poor credit score. On the other hand, about 21% have an excellent credit score!
For the VantageScore® credit score ranges, we have:
- Poor (300 to 499);
- Fair (500 to 600);
- Good (601 to 660);
- Very Good (661 to 780);
- Excellent (781 to 850).
This way, we can see that both the FICO® Score and the VantageScore® score have the same range of score categories. However, they don’t have the same ranges between the categories.
Based on everything you’ve read, you should now know that you have more than one credit score. You may find a variety of solutions.
Lenders may use one of the hundreds of possible credit scores to evaluate you, depending on the version of FICO® or VantageScore® they happen to be using. This number could easily rise into the thousands if custom-made models were also included.
And if you have a poor score, you must be wondering how to get a credit card with a poor score. Well, you can definitely find incredible card options and even loan options that will help you get great cards.
And this is one of the reasons why you need to understand how your credit score works and what is it for! You can read our topic below to learn more about your credit score and what are the main credit score models!
Which are the main credit score models?
There was only one credit score model available originally, which was the FICO® Score.
In 1989, when the FICO® Score was originally offered, there was no other comparable service.
In 2006, the three major credit reporting companies developed VantageScore® as a competitor to FICO® (Equifax, Experian, and TransUnion). This gave a better comparison for you to understand more about how your score is calculated.
Therefore, the credit score of a borrower may be calculated in a number of different ways, depending on whether the model used to do so is the Fair Isaac Corporation (FICO) score or the VantageScore® 3.0 model.
You probably wondered in your life how to get an 800 credit score. Well, now you know that it depends on which credit bureaus are analyzing your finances. But the way you live your financial life is almost the same to get an 800 credit score or just increase it.
But before you learn how to get to an 800 credit score, you’ll need to know how your score is calculated. And what these credit bureaus consider when calculating your score. Moreover, you can keep reading our next topic to know more about this!
How is your credit score calculated?
Before you learn how to raise your score, you need to learn how your score is calculated. But now that you know that there are more than one credit bureau and credit score type, you should know that they can calculate your score in different ways.
Credit scoring methods are based on complex mathematical algorithms. They calculate a score based on the information in one of your consumer credit reports (often on a scale from 300 to 850) to indicate your creditworthiness in the eyes of potential lenders.
FICO® and VantageScore®, two of the most widely used consumer credit scoring systems, both utilize somewhat different parameters to assess an individual’s likelihood of defaulting on their financial obligations.
You need a strong credit score to get the best terms and prices from lenders since it shows you’re less likely to default on your loans.
Therefore, there are some main factors that determine your score:
- Payment History (has the strongest influence);
- Amounts Owed (has a high influence);
- Credit History (has some influence);
- Credit Mix (not so influential);
- New Credit (not so influential).
Your payment history is the thing that influences the most out of your credit score calculation. So, you need to make all your financial payments on time and never make late payments. You’ll also need to keep your credit limit balanced so that this doesn’t influence the Amounts Owed category!
Because you now have a better understanding of the factors that go into determining your credit score, you will be able to discover the answer to a question that is very often asked: why is my credit score down?
In this manner, you will have a better understanding of the many categories of information that credit bureaus look at when determining your score. You’ll also have a better understanding of the factors that are contributing to the decline in your score.