Understanding credit scoring models will make informed decisions in the lending world. Credit cards can rely on one of the more common scoring systems, such as FICO or VantageScore, for their scoring.
In particular, the two play a big role in the credit risk assessment process. There is, however, a difference between these two methods in terms of the way they approach matters. Therefore, it is crucial to have a proper understanding of the differences to effectively manage and maximize customer strategies.
ALSO READ: How Voice Activated Phones for Seniors are Revolutionizing Mobile Banking
What Is FICO?
FICO, created by Fair Isaac Corporation, is the most widely used credit score model in the United States. This score ranges from 300 to 850 and assists lenders in evaluating the credit risk of an individual.
FICO’s model is mainly based on 5 factors:
- Payment History (35%) – This factor checks whether a consumer has paid bills in time
- Credit Utilization (30%) – The ratio of credit card balances to credit limits
- Length of Credit History (15%) – The length of time a consumer has been using credit
- Types of Credit in Use (10%) – The number of different credit accounts an individual has
- New Credit (10%) – The number of recent inquiries
FICO’s long history and consistency in scoring long-term credit behavior make it the standard for lenders and financial institutions.
What Is VantageScore?
VantageScore, developed by the three major credit bureaus—Equifax, Experian, and TransUnion—was introduced as an alternative to FICO.
Like FICO, the VantageScore ranges from 300 to 850, but it employs a slightly different methodology. VantageScore puts more weight on recent credit activity, making it a valuable tool for assessing consumers who may have experienced significant changes in their credit habits.
VantageScore is based on 6 factors:
- Payment History (40%) – Just like FICO, this is still the largest part
- Credit Utilization (20%) – The amount of debt versus available credit
- Depth of Credit (21%) – Length and diversity of credit history
- Recent Credit (11%) – The amount of times in recent time period new credit accounts have been established
- Credit Mix (10%) – Types of credit accounts being used by the consumer
- Available Credit (5%) – The amount of unused credit that is available
This model is flexible enough to always score a larger range of consumers, including non-traditional credit profiles.
Key Differences & Implications
The main difference between FICO and VantageScore lies in how they weigh various factors. FICO places importance on long-term credit behavior and, therefore, is an excellent tool for the assessment of people with well-established credit histories.
VantageScore, conversely, weighs recent behavior much more, which may allow it to give a more accurate insight into the creditworthiness of consumers who might have changed their financial behavior.
For businesses and financial institutions, it is important to know the difference between these two models in order to manage risk. The difference in the model may change the way consumers are perceived as creditworthy and may alter lending decisions, credit offerings, and customer engagement strategies.
To Conclude
Both FICO and VantageScore have strengths in their approaches to scoring, each offering valuable insights into consumer creditworthiness. With a good understanding of the nuances of each model, businesses can align their risk strategies better, enhance credit offerings, and strengthen customer relationships. As the credit landscape continues to evolve, leveraging both models can provide a more comprehensive view of consumer behavior and improve decision-making across the board.