What is a Credit Scoring Model? How Agencies Like FICO and VantageScore Evaluate Creditworthiness

When I was a kid, I was always a little anxious when I got my report card. Not that I was a bad student, but the thought of a teacher summing up my knowledge in a single letter grade made me nervous, and those periodic evaluations would help shape my future.

In personal finance, credit scoring models (with the help of information from the credit bureaus) play that role by condensing your credit history into a score that defines your creditworthiness.

Just as teachers use tests to grade your progress, credit scoring models like FICO and VantageScore assess your financial reliability and boil it down to a three-digit credit score. The models are basically mathematical tools that credit bureaus use to grade your creditworthiness based on your credit history and behavior. 

A credit scoring model is a tool used to calculate a three-digit score that reflects how likely you are to pay back borrowed money.

Lenders and creditors also use those scores to assess how risky it will be to lend you money.

If you’re reading this article, you may have felt the sting of a less-than-stellar credit score and want to understand how to improve your standing in the eyes of these credit scoring models. I’m here to guide you through the intricacies of the process and show you how you can turn a lousy score around.

Let’s start by exploring what credit scores are, who gets to see them, and why they are such a core part of your financial life. You need to understand these scores to appreciate the true power of credit scoring models.

Who Sees Your Credit Score

Your credit score is a single number describing how good or bad you are with borrowed money — a boiled-down, all-encompassing three-digit number. This score is used in many situations. The most prolific users of your credit score are creditors, be they banks, online lenders, or credit card companies. 

They pull this number from the credit bureaus to help decide whether to approve your loan or credit card application and what interest rates you’ll pay.

But your credit score doesn’t just go to lenders — many landlords use credit scores when figuring out whether to lease an apartment to you. The score helps them predict whether you will be dropping off the rent check on time each month. Insurance companies check your credit score when setting premiums based on the view that your credit habits indicate your overall level of risk.

Employers recruiting for jobs requiring high integrity and responsibility may want to see whether you have a good credit score. They view your credit score as an indicator of your reliability and trustworthiness. Your credit score isn’t just a number that stays between you and your creditors — it can affect many aspects of your life.

Why Credit Scores Matter 

Credit scores are crucial because they directly shape your financial options. When you apply for a loan or a credit card, your score is usually considered first. A high score may open the door to better terms, lower interest rates, and higher credit limits.

A low score can suppress your access to credit. Borrowing terms are more severe. Interest rates and penalties are high. Mortgage lenders and auto loan providers factor in your score when deciding whether to approve your application and what interest rate to charge. 

Poor scores may result in many thousands in higher costs over the life of the loan because of high interest rates. Sometimes, you might be unable to land a loan from any legitimate source. 

Beyond borrowing, your credit score can affect your lifestyle. A poor score can challenge your ability to acquire a rental apartment, a good-paying job, or reasonable insurance premium rates. 

The only way to escape credit scores is to never use credit. Believe it or not, you can (and many folks do) go through life with just cash, checks, and debit cards. 

However, the powers that be may deny your application or accept it and charge higher interest rates if you have no credit history. That’s because it is hard to gauge your creditworthiness without any record of your credit responsibility. 

FICO and VantageScore are the two major models that directly generate credit scores. Both basically do the same thing: comb through your credit history to come up with a score. However, there are some important differences in how they work the numbers. 

FICO has been in business for a longer time and is more widely used. VantageScore does its credit scoring a little differently. So a general grasp of the two models will help you interpret the scores they give you.

FICO Factors and Scoring Ranges

FICO is the granddaddy of credit scoring models and the one most lenders turn to when making decisions. FICO relies on payment history, amounts owed, new credit, account ages, and credit mix to calculate credit scores. Five key factors contribute to your score, which combine to give the big picture of your creditworthiness.

• Payment History (35% of total score): Your payment history is the most heavily weighted part of your FICO score. It stems from your bill-paying history and lets lenders know how trustworthy you are with credit. Definite score killers are late payments, missed payments, and accounts sent to collection. If you always pay on time, your score should increase and reassure potential creditors.
• Amounts Owed (30%): The next significant factor is how much you owe across all your credit accounts. It includes your credit utilization ratio — how much of your available revolving credit you’re using (excluding secured lines of credit). Frequently, using a large percentage of your available credit signals to creditors that you may be financially overextended. In addition, your credit score will take a hit. Keeping your balances low relative to your credit limits is key to coaxing your score upward.
• Length of Credit History (15%): Also important are the ages of your credit accounts. The older the account, the more it helps your score, as creditors can draw more accurate conclusions about your behavior. FICO looks at the age of all your accounts, including the oldest, newest, and average of all your accounts. It helps your credit score to keep old accounts open, even if you use them only occasionally.
• Credit Mix (10%): FICO considers your mix of debts, such as revolving credit (e.g., credit cards, store cards, lines of credit) and installment loans (e.g., mortgages, car loans, personal loans). A broad mix demonstrates that you can manage different kinds of debt responsibly, which should help your score.
• New credit (10%): Finally, FICO considers new hard inquiries, which occur when you apply for a new credit card or loan. When you apply for credit, you authorize the creditor to pull your credit report from one or more credit bureaus. These hard inquiries remain on your credit reports for two years and may slightly reduce your score during the first year. 

However, applying for many new accounts within a short period (i.e., six months) implies you are taking on too much debt too quickly, causing more pronounced harm to your score. The exception is when you rate-shop for competing loans, such as mortgages or car loans — these count as a single hard inquiry.

FICO Scores and Their Categories

FICO scores range from 300 to 850, with a higher number indicating a better credit risk. 

Not sure how to break this down? Here are the figures:

• Poor (300-579): You’ll struggle to get approved for credit, and if you are approved, prepare for high interest rates.
• Fair (580-669): You won’t get the best terms, but you should be approved for most types of credit.
• Good (670-739): You are considered a low-risk borrower and will likely be offered better interest rates and terms.
• Very Good (740-799): You have a better chance of qualifying for high-quality credit terms.
• Exceptional (800-850): This rating qualifies you for the very best credit.

The average credit score in the US usually hovers between 715 and 725, squarely in the “Good” category. If you are a credit newbie, expect your FICO score to be somewhat lower.

VantageScore Factors and Scoring Ranges

Not long ago, VantageScore joined the credit scoring game. The new player in town was launched in 2006 by the three major credit bureaus: Equifax, Experian, and TransUnion. VantageScore was created by the three major credit bureaus and uses six factors to determine credit scores. It has created some inroads with lenders, although it is used less often than FICO. 

The score is comprised of the following factors:

• Payment History (40%): Payment history is more important in the VantageScore model than in FICO. This factor emphasizes the importance of paying bills on time, with a good payment history capable of boosting your score. Late or missed payments drag down your score more than in the FICO model.
• Credit Depth (21%): This factor looks at how long you’ve used your credit history and your different types of credit accounts. The VantageScore Credit Depth puts less emphasis (21% of the total score) than the sum of FICO’s Length of Credit History and Credit Mix (25%). Your score benefits from a long history and a wide variety of credit accounts but will be lower if your history is short or sparse.
• Credit Utilization (20%): VantageScore considers credit utilization as its own category, separate from other amounts owed. Ideally, this ratio should be below 30%. You’d like it as low as possible because high utilization is a signal of overdependence on credit.
• Balances (11%): This variable is defined as the sum you owe on all your accounts. It is similar to the FICO Amounts Owed without the credit utilization component. VantageScore considers real dollar balances in its calculations, not just the percentage of those balances relative to credit limits. High balances can pull your score down, even if your utilization is relatively low.
• Recent credit (5%): This factor is sensitive to the number of new accounts opened recently. Much like the FICO New Credit factor, this category may hurt your credit score if you apply for several accounts within a short period. However, VantageScore is relatively less influenced by this factor.
• Available credit (3%): This factor has no analog in the FICO system. It considers the total amount of credit accessible to you, independent of utilization. Still, it has little bearing on your score. Obtaining more credit can improve your credit score to a small extent.

VantageScore Scores and Their Categories

VantageScore scores also range from 300 to 850.

Although they share the same endpoints, VantageScore divides its range differently based on your approval odds:

• Very Poor (300-499): A score in this range makes it really tough to get approved for most types of unsecured credit.
• Poor (500-600): You have a moderate chance of being approved, but with not-so-good terms.
• Fair (601-660): Approval is likely, but with average terms that are not the best.
• Good (661-780): You’ll get great rates with attractive terms.
• Excellent (781-850): You’ve got a solid credit score and should qualify for the best rates and products. 

In practice, these score categories are not all that different from FICO’s. That means you should have similar scores in both systems, although they will seldom match.

Other Differences

VantageScore has some technical differences with FICO when treating certain types of debt. Some of the major differences include:

• Medical Debt: VantageScore is much easier on medical debt than FICO. If the medical debt is less than six months old, VantageScore doesn’t use it when calculating your score. This grace period gives you time to work out what’s covered by insurance and what payment hiccups may have occurred without hurting your credit score due to this one debt issue. FICO includes medical debt in its calculation when it appears on a credit report but disregards paid medical collections.
• Trended Data: VantageScore looks at trended data about your credit behavior over time—for example, whether you’re paying off your balances in full each month or just making minimum payments. This differs from older FICO versions, which traditionally look at credit information at one point in time. However, the latest version, FICO 10T, includes trended data, although this version is used less than FICO 9.
• Non-Traditional Data: VantageScore includes any non-traditional data, such as utility and rent payment records, if reported to the credit bureaus. FICO — at least traditionally — has maintained a very narrow focus on credit card and loan repayments. Recent versions, such as FICO Score 9 and 10, have started including rent and utility payments — if they are reported.
• Hard Inquiry Impact: VantageScore treats multiple hard inquiries triggered by mortgage, auto, or student loan applications made within a 14-day window as a single inquiry to help reduce the impact on your score. The same is true for FICO; however, its timeframes vary (i.e., from 14 to 45 days) based on the version of FICO used. 
• Personal Loans: FICO 10 puts more significant weight on personal loans, especially when used to consolidate credit card debt. If you consolidate and then begin compiling even more credit card debt, your FICO 10 score will take a dive. This was not as big an issue in prior FICO versions.

These differences mean that the same financial behaviors may result in different scores depending on whether a lender uses VantageScore or FICO to evaluate your creditworthiness.

In this section, I’ll lay out how lenders use credit scoring models to make decisions about loans, credit cards, and other financial products. These will help you see how your credit score impacts the financial options available to you.

Personal Loan and Credit Card Approvals

Your credit score is central to approval for personal loans and credit cards. Most creditors use your score as a shorthand to establish your creditworthiness — basically, how risky it is to lend money to you. Having a score in the favorable zone pays off by increasing your odds of getting approved on better terms.

If you have a lousy credit score, you may find it difficult to get a decent loan, even if your income is high. On the other hand, a lower score may result in an outright rejection or approval with a higher fee and lower credit limit. This is because lenders look at lower scores as an indication that you may struggle to repay your debt.

Your credit score isn’t the only factor considered, but it carries significant weight. Other important factors include income, employment status, and existing debts. Nevertheless, poor credit seems to outweigh even a high income, making many loans or credit cards very hard to qualify for if you have bad credit. Good credit is crucial if you want to access the full range of credit options. 

Setting Interest Rates and Terms

Your credit score doesn’t just dictate whether you’re approved for credit. It also influences the interest rates and terms you’re offered. In general, the higher your score, the lower the interest rates available to you. 

Creditors offer high-scoring consumers better terms because of lower risk. This can save thousands of dollars on interest over the life of a loan.

The lower your credit score, the higher the interest rates you’ll likely pay. That’s because the interest rate is how lenders get compensated for the risk of lending to someone with a troubled credit history. 

In addition, with lower scores come stricter loan terms — including shorter periods to pay back a loan and higher down payments. It also means you’ll be limited to credit cards with high APRs and fees. All in all, your credit score will play into how much it costs to borrow money.

Auto Loan and Mortgage Approvals

A credit score is usually among the first considerations when lenders decide whether to approve auto and home loans. Regarding an auto loan, if you have a good credit score you can get better financing options, such as lower interest rates and longer loan terms. 

This will substantially affect monthly payments and the total amount paid. On the other hand, a poor score may limit you to higher-interest loans with larger down payments.

Mortgage lenders are often more rigorous. Since a mortgage is a long-term liability, it’s in the lender’s interest to know whether you can make good on your payment obligations for many years. That’s where the magic of credit scoring comes in. 

With a high score, you’ll be eligible for a lower interest rate, likely saving tens of thousands over a 30-year mortgage. 

You can still get a mortgage with a poor score, but you’ll end up with a higher interest rate and fees, making the overall cost of homeownership more expensive.

Many mortgage lenders sell their loans to institutions that pool and repackage them into various types of bonds. This removes the lender’s risk that the borrower will default. However, a borrower’s low credit score makes selling off the mortgage more difficult and less profitable.

Here are some tips to steadily improve your credit score over time. Practicing good financial habits—making on-time bill payments, keeping debt levels low, and keeping a close eye on your credit–can raise your score to a level that provides many more financial opportunities.

Make Timely Payments

One of the easiest and most efficient ways to improve your credit score is to pay all your bills on time. You can use reminders on your devices or calendar for this, but the crème de la crème is to set up automated payments.

You can’t have a good credit score if you don’t pay your bills on time.

With automatic payments, you never have to worry about forgetting the due date. This protects your payment history — one of the most critical factors for your credit score.

Try to Reduce Your Debt 

Another powerful way to improve your credit score is by reducing your credit card balances. Consider, for example, the Avalanche Method of repaying high-interest debts first to mitigate the high costs. You can also use the Snowball Method to pay off your smallest debts first and get some easy wins before tackling your biggest debts.

Debt consolidation options, such as a balance transfer credit card or a personal loan, can also help you secure lower interest rates and make debt repayment easier. Your credit utilization ratio should really be kept low — ideally below 30% — to bump your credit score.

Closely Monitor Your Credit 

It helps to rigorously check your credit reports and scores to keep your credit scores healthy. This way, you can quickly respond to inaccuracies or fraud indicators early enough to minimize damage to your credit. You can request a copy of your credit report from each of the three major credit reporting bureaus free of charge. You can then file disputes to correct inaccuracies or fraudulent activities on your reports.

Credit-scoring models are like a trusty yardstick that lenders use to judge how risky it would be to lend you money. They crunch all the details from your financial past into one simple number that helps creditors decide “yes” or “no” to your loan or credit card application. 

These models may seem complicated, but they are designed to help everyone make intelligent, more informed choices. Because after all, no one likes surprises when lending money.