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Understanding The New VantageScore Formula

Understanding The New VantageScore Formula

The Differences Between FICO and VantageScore

VantageScore 4.0 will begin to roll out this fall, meaning that any prospective creditor that uses this model to determine your creditworthiness will start to change over to the new system. It won’t happen overnight, and it won’t replace FICO — both VantageScore and FICO have been around for years now, and creditors can choose to use one or both methods when evaluating applications — but it is worth taking a brief look at how the two scores differ and what VantageScore 4.0 could mean for you.

Tablet showing a credit score, representing the VantageScore

VantageScore vs. FICO

While there are a number of small differences between the two models, the biggest is that VantageScore was jointly created by the three big credit bureaus: Equifax, Experian and TransUnion. One goal was to create more consistency. FICO uses data pulled from each bureau, and those reports can vary wildly. VantageScore seeks to combine it all into a single file before assigning a score.

Another big difference is that FICO requires at least six months of credit history before a score can be assigned. VantageScore requires only one. That means those who are just starting out on their credit journey will get their VantageScore much faster, which in turn will open up more opportunities that require a credit score in the first place.

The two models also treat late payments and hard inquires differently. FICO gives the same weight to all late payments, regardless of the type of account. VantageScore, however, gives more weight to late mortgage payments — if you pay every utility bill on time but you are late on your mortgage, you will see a much bigger dip on VantageScore.

When it comes to hard inquiries, FICO treats all of them of the same type — say for an auto loan or refinance — within a 45-day period as one single hit; VantageScore will only group those compiled in a 14-day period. On the other hand, FICO will only combine inquiries for mortgages, automotive, and student loans, whereas VantageScore applies this philosophy to all types of credit, including credit cards.

So as you can see, while the differences might seem relatively minor, they can have an impact on your score, and with that, your ability to secure new lines of credit.

VantageScore 4.0

Now that you understand some of the subtle differences, what does a change to VantageScore 4.0 actually mean for you? Here is a breakdown of the changes the new system will start rolling out:

  1. VantageScore 4.0 incorporates new technological advancements designed to increase the accuracy of the score.
  2. The new model uses the familiar 300–850 scale range introduced with VantageScore 3.0.
  3. The new model is the first in the industry designed to align with consumer-focused changes in the way Equifax, Experian and TransUnion handle several types of negative credit-file records, such as medical bills in collections, tax liens and public records. Under a program called the National Consumer Assistance Plan (NCAP), the bureaus are making procedural changes that will greatly reduce the number of these records that appear in consumer credit files. As they roll out improvements under NCAP, tax liens and public records data that historically was used to calculate consumers’ credit scores likely will be eliminated entirely or in part.
  4. VantageScore 4.0 penalizes unpaid medical collections less than other types of unpaid collections, and ignores unpaid medical collections less than six months old, to give insurance companies ample time to make payments. Consistent with the VantageScore 3.0 model, paid collections (including paid medical collections) are excluded in the VantageScore 4.0 model.
  5. The VantageScore 4.0 model leverages machine learning techniques to better score consumers with sparse credit histories. Analysts say this approach will significantly improve the model’s ability to accurately assess up to 35 million consumers who can’t obtain FICO scores.
  6. VantageScore 4.0 takes advantage of “trended credit data” newly available from all three bureaus. Trended credit data reflects patterns in borrower behavior, such as shifts in the number of balance decreases over time, or increases in the rate of a borrower’s utilization — the portion of the individual’s credit limit represented by their outstanding balances. By capturing the trajectory of borrowing and payment behaviors, trended credit data provides a more precise, holistic view of consumer habits. Using trended credit data, the VantageScore 4.0 credit scoring model tends to lift “prime” credit scores by as much as 20%.

As you can see, the changes to VantageScore is designed to help give a more accurate picture of consumer spending habits and give credit providers a better idea of how likely a borrower is to pay back loans of all types. For most people, this will actually result in an increase in credit scores. One-time mistakes or major life events will be less likely to have a long-term negative impact. As you keep an eye on your credit score over time, make sure to take note of which scoring method your provider is using — it really can make a difference.

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