The three main credit reporting bureaus -- companies that collect consumer credit information and furnish it to lenders -- have long produced credit scores using formulas devised by the Fair Isaac Corp., which gave the scores their name: FICO scores. In 2006, the bureaus began producing scores based on a formula they devised themselves. They call their version the VantageScore, and they offer it to lenders and consumers alongside the FICO score.
Fair Isaac developed its first general-purpose credit score, the "Beacon Score," for the Equifax credit reporting bureau in 1989. By 1991, it was also producing scores for the other two bureaus, TransUnion and Experian. Because each of the three bureaus had its own methods of collecting data and applying FICO formulas, an individual's score could vary, sometimes significantly, from one bureau to the next. The bureaus pointed to this inconsistency, as well as consumer confusion about the meaning of credit scores, when they launched VantageScore in 2006. With VantageScore, each bureau applies the same formula -- but they still collect data in different ways, so scores can still vary.
FICO scores range from 300 to 850, while VantageScores go from 501 to 990. In both cases, the higher the score, the more creditworthy the individual -- that is, the more likely that person is to repay debts and repay them on time. The VantageScore system also translates its scores into letter grades: Scores of 900-990 indicate someone with "A" credit, 800-899 is a "B," 700-799 is a "C," 600-699 is a "D" and 501-599 is an "F."
The FICO and VantageScore formulas are both proprietary -- secret, in other words -- but the developers of each system have identified what factors go into the calculations and how much weight the formulas give to those factors. In the FICO calculations, the single biggest factor is payment history, which accounts for 35 percent of the score. "Amounts owed," both in dollar terms and as a percentage of all available credit, account for 30 percent. The length of a person's credit history is 15 percent. "New credit," which covers recently opened accounts and recent credit applications, is 10 percent. The types of credit used -- credit cards, mortgage, car loan and the like -- make up the final 10 percent.
In the VantageScore formula, payment history is also the biggest factor: 32 percent. "Utilization," or the percentage of available credit that has been used, accounts for 23 percent. Recent credit balances account for 15 percent. "Depth of credit" -- which combines length of credit history and types of credit used -- makes up 13 percent. New credit is 10 percent. Available credit -- total amount of all unused credit -- is 7 percent.
MSN Money columnist Liz Pulliam Weston says that, despite the credit bureaus' assertions that they developed VantageScore to better serve consumers, the primary motivation is likely profit: If they can get their own formula accepted as the standard for scoring credit, they won't have to pay Fair Isaac for the right to use the FICO formula. Ultimately, she says, the formulas take all the same information into account; they just slice it different ways.
