What is credit scoring?
Quick insights
- Credit scoring is used by financial institutions to help determine your creditworthiness.
- There are various credit scoring models, but you may see that VantageScore® and FICO® score are widely used.
- Understanding your credit score can help you adjust your credit behaviors.
Lenders may see your credit score when they run a soft check or a hard check. Credit scoring models are used to generate your score. In this article, we’ll review what credit scoring is as well as the different credit scoring models.
Understanding credit scoring
Credit scoring is a tool that lenders use to help determine the risk of lending money to a borrower and how likely that borrower is to default on their loan obligations. Credit scoring involves assessing a three-digit credit score that reflects a borrower’s creditworthiness, or their ability to repay their debts in a timely manner. This score also helps determine a potential borrower’s annual percentage rates (APRs), credit limit, loan terms and more.
Understanding your credit score can help give you a broad overview of your credit behaviors. Once you have a grip on which financial habits affect your credit, you can find ways to adjust and tailor those behaviors to help maintain or improve your credit score.
How credit scoring models work
Credit scoring models use data about a person’s credit behavior to feed into an algorithm that assesses the main factors that go into generating a credit score, such as payment history and credit utilization.
This data is collected by the three main credit bureaus—Experian™, Equifax® and TransUnion®. The data is pulled from a variety of places, such as banks, financial institutions, credit card companies and other entities.
Major consumer scoring models
The two very widely used scoring models are VantageScore 3.0 and FICO Score 8. These versions are highly reputable and have probably been used longer than other versions.
Both models use a range of 300-850, but the way they categorize these credit score ranges differs. Both VantageScore and FICO use similar key factors to generate your credit score, but how they weigh these factors differs. Let’s breakdown their credit score factors below.
As of 2024, VantageScore 3.0 breaks down the factors in the following ways:
- Payment history (40%)
- Age/type of credit (21%)
- Credit utilization (20%)
- Credit balances (11%)
- Recent credit (5%)
- Available credit (3%)
As of 2024, FICO Score 8 breaks down the factors in the following ways:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
As you can see, with factors weighed differently, you may receive two different credit scores. This is not necessarily an error, rather, a reflection of that credit scoring model’s particular calculation method. For example, if you are consistent and timely with your payments, you may see this affects your VantageScore 3.0 more, which weighs payment history 10% higher than FICO score.
Credit scoring models and their ranges
Understanding where your credit score falls can be an important part of understanding your credit profile and, if needed, where to adjust your behaviors. Let’s breakdown the credit score ranges for these scoring models in detail below.
As of May 2024, VantageScore ranges areexperian-vantage-score:
- Excellent: 781 to 850
- Good: 661 to 780
- Fair: 601 to 660
- Poor: 500 to 600
- Very Poor: 300 to 499
As of May 2024, FICO score ranges aremyfico-credit-scores:
- Exceptional: 800+
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 579 and below
In conclusion
Credit scoring models are an important part of the ecosystem of credit scores. Credit scores are used widely by lenders when considering you for new lines of credit and also looked at by other types of entities, like landlords.
