The Credit Scores That Lenders Use Most
Not only does your credit score evolve (typically covering six-year periods) as your borrowing and payment history matures, it’s also determined by three potential sources that report varying numbers based on different types of credit scores. It’s important to know that not all lenders use the same scores, and there’s plenty you can do to achieve your best possible score. Let’s take a look behind the curtain at the credit score lenders use most and why.
The Three Credit Reporting Agencies
Whenever you apply for a loan, payment plan or credit card — whether it’s with a bank or utility company — that lender will request your credit score from a Credit Reporting Agency. The use of credit bureaus to rate creditworthiness dates back as far as 1899. Today, some 190 million Americans now have a credit card, but credit reports are issued by just three agencies: Experian, Equifax and TransUnion.
These agencies are regulated by the Consumer Financial Protection Bureau, which also operates a searchable database of consumer complaints. Credit agencies don’t come up with the score themselves but instead pull it from two primary data analytics services. As a consumer, you won’t necessarily know who generated your score, and each credit agency might score you differently.
The Types of Credit Scores Agencies Use
Credit agencies obtain their scores from two main data models: FICO (Fair Isaac Corporation) and VantageScore. Of the two, FICO is by far the more commonly used, playing a role in 90% of lending decisions in the US. However, credit score changes typically apply to all credit scores the same, including all FICO® & VantageScore® versions. This is because all credit scores are derived from TransUnion®, Experian® and Equifax® where your payments and spending are reported.*
The intention of establishing credit might have been to clarify creditworthiness, but even with just two models to choose from, there may be some confusion. That’s because each model sets out separate ranges for what constitutes a ‘good’ or ‘bad’ score. FICO defines a good score ranging from 670 to 739, whereas the spread for VantageScores is from 661 to 780. Ultimately, it is up to the lender — not the consumer — to evaluate the score, and they may take a broader view.
What Are Lenders Looking For?
To complicate things more, both FICO and VantageScore issue a variety of scoring models based on separate algorithms. Lenders will look at FICO Score 8 for general borrowing, whereas mortgage lenders typically focus on FICO Scores 2, 4 and 5. What’s the difference? The factors that contribute to the overall score are weighted differently for each version.
What Makes up Your Credit Score
- Payment history. Do you pay on time? (35%)
- Credit utilization rate. How much of your available credit are you using? (30%)
- Length of history. How many months/years have you been a borrower? (15%)
- New credit. How often do you apply for new credit streams? (10%)
- Credit mix. What cards, payment plans and loans make up your portfolio? (10%)
High credit utilization might be an issue for general lending. Still, it is weighted as less influential for mortgage applications, given that the mortgage loan will overshadow any existing credit lines. For mortgage applications, banks will usually request credit scores from all three credit agencies. If two are the same, they will pick that score; if all three are different, the median score prevails.
Why It Matters
Greater transparency might have been the goal of credit agencies, but the calculations and models they use largely remain a mystery to the borrower. However, what doesn’t change are the strategies you can leverage to achieve your best possible credit score. From making regular payments to moving your balance to lower-interest loans, you can read more about these strategies here.
If you want to achieve your best possible credit score — regardless of its source — discover our tools and services to manage your borrowing, secure better interest rates, and qualify for the mortgages or loans you’re looking for.
*FICO® is a trademark of Fair Isaac Corporation and is unrelated to SmartCredit®. TransUnion®, Experian®, Equifax®, and VantageScore® are registered trademarks of their respective owners.