All governments decide on a credit scoring models to help financial institutions and banks follow a standard in credit assessment while giving out loans. A credit score is a number that represents the credit worthiness of a person or business, depending on various factors. Lenders refer to the credit scores to evaluate the potential risk involved in lending money to consumers. It is thus used as a means to mitigate losses due to bad debt.
A number of credit rating agencies dole out credit scores, so it is important to find a reliable one. Currently, two primary credit scoring methods are in vogue- Vantage Score and Fair Isaac Corporation (FICO).
What is Vantage Score?
The Vantage Score credit scoring model first emerged in 2006 and was started by three credit bureaus namely, Experian, Equifax and TransUnion. The latest edition of the scoring method was introduced in March 2013, called the Vantage Score 3.0. It was revised as an alternative model to include non-included people (those who had less than 6 months of credit histories / no open trade lines / trade line activity more than 24 months old etc.) which accounted for around 30-35 million people worldwide, a significant chunk being in the US.
What is a Good Vantage Score?
Whether a Vantage Score is great or not, can be arrived at from the following table:
|Excellent||720 – 850|
|Good||660 – 719|
|Fair||620 – 659|
|Bad||300 – 619|
How is Vantage Score 3.0 Different From Vantage Score 2.0?
Vantage Score 3.0 poses a better people coverage by factoring in credit-less people too. This paints a truer big picture of the credit situation for population groups. Other changes from the Vantage Score 2.0 to 3.0 are:
- Vantage Score range revision. The range for Vantage Score 2.0 was between 501 to 990, whereas for 3.0 it is 300 to 850, which is more aligned with credit range standards. Such a standardised range will help people better understand their credit worthiness easily, and also serve as a standard input in automated software used for lending decisions.
- Collection accounts that have been fully paid for are not included in calculating your Vantage Score 3.0. This will somewhat reduce the burden of bad debt on consumers, at least in terms of the credit rating.
- Vantage Score 3.0 will penalise those who default on mortgage repayments more than those who default on a credit card or auto repayments.
What Does Vantage Score Depend on?
The Vantage score depends on a number of factors, listed here in order of influence:
- Payment History (40% Weightage): This is the number 1 predictor of the credit score. Late payments are recorded in the credit report for up to seven years, making it a reliable information source for lenders to decide whether you are capable of paying back.
- Depth of Credit i.e. Age And Type of Credit (21% Weightage): The type of credit you hold i.e. the account mix and the length of credit history significantly impacts the credit score. Generally, a mix of accounts (such as credit cards, savings account, current account, loans) is a healthy indicator.
- Credit Utilisation (20% Weightage): This is nothing but your balance divided by available credit. A good ratio is below 30%.
- Balances (11% Weightage): This metric looks at your total and paid debt position. A lower debt level is desirable to generate a good credit score.
- Recent credit (5% Weightage): Recent activity such as the number of credit lines opened up, number of hard enquiries made etc. A hard enquiry is an enquiry by a lender to make a lending decision. It may lower your credit score.
- Available Credit (3% Weightage): The amount of credit available to you is one of the least influential factors affecting the credit score.
Since the introduction of the new 3.0 model, more than 8 billion new scores have been issued. It is emerging as a clear competitor to the market leader, FICO.
Read more on other financial topics at MoneyTap – Your Personal Line of Credit.