(Article Updated April 12, 2019)
The value of good credit touches so much of our lives and can put the big purchases, like a home or a car, in or out of reach, depending on your score. But how is credit assessed? Why is credit important? Who decides it and how?
You might be surprised to learn that no one has just one credit score. There’s the traditional industry standard credit score from FICO, which was originally an acronym for Fair, Isaac and Co., a data-analytics company founded by Bill Fair and Earl Isaac in 1956. They announced the first credit bureau risk score in 1981.
Lenders can get your FICO score from any one of three credit reporting agencies – Experian, Equifax, and TransUnion – and each one could report a different score. To make matters even more interesting, the three credit reporting agencies, in 2006, came up with their own credit-reporting system called VantageScore, which is similar to FICO but produces yet another credit score for you.
It’s important to understand how credit is assessed so that you can maximize and improve your scores across the board prior to your home purchase.
Once you have a general idea of your credit score and it’s where you want it to be, a home-purchase loan from loanDepot may get you in your dream home. If you are thinking about buying a home, a Licensed Lending Officer can help. Call for more information today.
FICO vs. VantageScore
Both FICO and VantageScore use the information from your credit reports to arrive at your credit score. But the models treat and interpret the information in the reports differently. Here are three differences between the two scoring models:
- To get a FICO score, you need at least six months of credit history. You can get a VantageScore with only one month of credit history.
- FICO judges all late payments the same, but Vantage dings a late payment on a mortgage loan more than any other type of credit.
- Inquiries from lenders are handled differently. When you apply for a loan for an item, like a car or a house, you’ll probably shop around for the best deal. And when you do, each lender pulls your credit report. Instead of dinging your credit score for each inquiry, both FICO and Vantage recognize that you are applying to buy only one car or house, not multiple cars or homes. So they lump all those car or home loan inquiries into one. But the timeline differs between the two: FICO allows between 30 and 45 days for this process, and Vantage allows only 14 days.
How you can get the best credit score possible
Both FICO and Vantage consider the same criteria to determine your credit score – the information in your credit reports – but they weight the criteria slightly differently. They both, however, issue a score between 300 and 850. The higher your score with both, the better.
Payment history is the most important factor in your FICO and Vantage credit scores. Factors with the greatest impact on the FICO score include amounts owed, and then length of credit history, credit mix, and new credit. For Vantage, age and type of credit and percentage of credit used are considered next after payment history. Your total balances are then considered followed by recent credit inquiries and available credit.
To get the best credit score possible and land the most favorable interest rate from lenders, make sure you always pay your bills on time, are not overextended on your debts, keep your accounts open – even if you aren’t using them – to improve your credit history, have both credit cards and installment loans, and refrain from opening new credit accounts just before you apply for a loan. If you follow this advice, you should have a high credit score no matter which scoring system or credit-reporting agency lenders use. You should also get a free annual credit report from a reputable source to check for any errors.
More ways to boost your credit score
The UltraFICO™, a recently introduced credit score model was designed to help consumers improve credit ranking and broaden access to more lending options. Now consumers are empowered to securely link their checking, savings and money market accounts to enhance their FICO® Score, providing an unprecedented and broader view for lenders to assess credit worthiness. Even though this approach may give you a credit score boost, one of the surest ways to improve credit score is by following behaviors that have the greatest impact on your credit score.
When your credit score is in tip-top shape and you’re ready to buy a home, speak with a loanDepot Licensed Lending Officer to get pre-approved for a home loan and start your home search today.
Originally Published Jan. 18, 2018
loanDepot.com, LLC does not provide legal, investment, accounting or tax advice, please consult a financial expert for more information on this subject.