FICO score or not, all credit scores measure your credit risk. A healthy score can open doors, help you purchase, sell, and do a lot of other things — without spending a fortune on premiums. Beware of a poor credit score because it may make it difficult to access the finances you may need to fuel your dreams.
But not all credit scores are alike. Two major credit systems are used to determine creditworthiness — VantageScore, and FICO. We’ll show you why it matters and how to calculate them.
What are FICO scores?
FICO stands for Fair Isaac Corporation, which was also the first company to offer a credit-risk score. A type that is widely used, FICO uses a formula to measure and assign your creditworthiness. It considers the following factors:
· Payment history
· Outstanding balances
· Age of credit
· New credit
· Credit mix
Since 1989, FICO scores have been consistently used by more than 90% of top lenders, with regular updates in the scoring models. Along with base versions, it also offers industry-specific scoring models for credit products such as auto loans, credit cards, and mortgages.
It can be identified that these scores won’t necessarily be identical to what the lender would see when applying for credit through the bank.
Base FICO scores ( Fico 9 score) range from 300 to 850 and consist of the following important factors:
· Payment history: 35%
· Amounts owed: 30%
· Length of credit history: 15%
· New credit: 10%
· Credit mix: 10%
Here are FICO’s 8 credit scores and what they mean :
· Exceptional: 800+
· Very good: 740 to 799
· Good: 670 to 739
· Fair: 580 to 669
· Poor: 579 and below
Industry-specific FICO scores have a broader range of about 250 to 900 (it includes FICO Auto Score 8 and FICO Bankcard Score 8). These scores cater to specific types of credit. One can have free access to the FICO scores.
If you’re a lender, such as a bank, a mortgage company, or a credit card issuer, you must obtain the best possible credit score. If you take out a huge loan, with the accuracy to predict who would most likely pay back and who wouldn’t, you can opt for offering the most competitive rates while minimizing delinquencies and defaults.
The other credit score is VantageScore, created in 2006 as a joint venture of the three major credit bureaus: Equifax, Experian, and TransUnion. A VantageScore is generated with just one month of credit history using the same range, making it better for new credit users. It uses a different formula to calculate a person’s score.
In no order of importance, it consists of the following elements:
- Credit usage, balance, and available credit
- Payment history
- New credit
- Age of credit
- Credit mix
It has four models, and the latest, VantageScore 4.0, uses a range between 300 to 850.
More than 2,200 financial institutions use VantageScore credits. The scores affect the following factors:
- Payment history – extremely influential
- Percentage of credit limit used – highly influential
- Age and type of credit – highly influential
- Total balances and debt – moderately influential
- Available credit – less influential
- Recent credit behavior and inquiries – less influential
The range distribution for the VantageScore 3.0 credit-score model is as follows:
· Excellent: 750 to 850
· Good: 700 to 749
· Fair: 640 to 699
· Needs work: 300 to 639
Is a FICO score the same as a credit score?
FICO Scores can predict the likelihood if someone will fall behind on a bill within the next certain months. It uses a complex algorithm based on information in the credit report from each of the national credit bureaus: Experian, TransUnion, and Equifax.
New versions of FICO scores are released periodically, and thus, one may find different versions in the market. For smooth and efficient working with each of the three bureau’s databases, it creates different versions of its scores accordingly.
VantageScore also creates credit risk scores that similarly analyze consumer credit reports to calculate scores.
Consumer credit behavior is ranked using the credit scoring models, so someone with a higher score is less likely to miss a payment than someone with a lower score. Therefore, a higher score can help you secure better terms when you’re applying for credit.
FICO and VantageScore credit scores range from 300 to 850, and group consumers using these credit scoring ranges. For example, a FICO score of 800 to 850 is considered “exceptional.”
However, each scoring model takes a unique approach that may result in a different score even if they use the same field and information from the same credit report. In part or entirely, FICO also creates other types of scores based on a credit report. For example, with the help of its credit-based insurance scores and bankruptcy scores, you may predict the chance that you’ll file an insurance claim or declare bankruptcy, respectively.
FICO is more transparent than credit scores and, most times, comparatively cheap for all the parties involved. However, reports produced by the three credit bureaus are important to monitor your progress because it helps to attain that ideal credit score.
What are CIBIL scores?
CIBIL scores represent an overview of your credit health, creditworthiness, and credit utilization information. This information refers to all financial transactions where you have borrowed or repaid the money.
Your CIBIL score is important because it showcases how dependable you are as a borrower. Thus, it has a direct impact on your eligibility for a loan, what loan amount should you be offered, along with what rate of interest to be charged.
A high CIBIL score has a lot of benefits while applying for a loan such as:
- Quicker and faster loan application process
- Easier loan documentation process
- Lower interest rates on the loan
- A higher quantum of loan
- Longer or more flexible repayment tenure
What is a good CIBIL score?
Anywhere between 300 and 900 is a good CIBIL score, with 900 denoting maximum creditworthiness. 750 or above in the score graph is ideal and will aid in qualifying you for loans and credit cards.
Here are the different ranges of a CIBIL score.
NA/NH: NA/NH means either it is “not applicable” or “no history”. If you have never used a credit card or have not taken a loan, you will have no credit history.
350 – 549: A CIBIL score in this range is considered a bad CIBIL score. It means you have been delaying in paying your EMIs for loans or credit card bills. This might showcase that you are at a high risk of turning into a defaulter.
550 – 649: This range is considered fair. However. It suggests you have been struggling to pay the dues on time and only a handful of lenders would consider offering you credit with higher interest rates.
650 – 749: You are on the right path if this is your CIBIL score range You should continue displaying good credit behavior and increase your score further.
750 – 900: This is an excellent CIBIL score. It shows you have been regular with credit payments and have a credible payment history.
How can you maintain a great CIBIL Score?
A CIBIL score of 750 and above is considered ideal. Keeping your CIBIL score on track can help you increase the chances of getting a loan easily approved. Here are some important tips to have a great CIBIL Score.
- Maintain track: Paying all your dues on time should be your priority since credit history and loan repayments have the strongest impact on your CIBIL score.
- Low Credit Utilisation Ratio: Keep your credit utilization ratio at 30% for a good CIBIL score.
- Variety helps: It is better to have a good combination of secured and unsecured debt in order to get a high CIBIL score.