Banks and financial institutions evaluate your creditworthiness before offering you credit in the form of a loan or a credit card. This evaluation is carried out with the help of credit scores calculated and published by authorised credit bureaus and rating agencies.
However, credit scores are not the only scores that help financial institutions measure your creditworthiness. In the US, there is also something called VantageScore, which is similar to a credit score in several respects. Let’s understand the meaning and various aspects of VantageScore in detail.
VantageScore is a relatively new concept that was introduced in 2006. The top three credit bureaus in the US (Equifax, Experian, and TransUnion) developed the concept of this score which serves as an alternative to the credit or FICO score (used in the US). VantageScore measures your credibility as a potential borrower. However, it gives new borrowers some leeway so that they become eligible for credit facilities.
The three credit bureaus mentioned above calculate individuals’ VantageScore, which ranges from 300 to 850. They use ML (Machine Learning) technology to assess and evaluate consumers’ creditworthiness.
Many financial institutions and credit bureaus allow you to check your VantageScore and get a credit report. You can check your VantageScore through Equifax too. The process is as follows:
Visit the Equifax website and click on the option that calculates your credit score.
Provide your information, and the calculator will calculate your VantageScore.
Equifax also offers a detailed credit report that indicates your past and present credit and how you used them. You can put in a request for the credit report and access a detailed account of your credit behaviour.
When your VantageScore is calculated using online calculators, behind the scenes, these calculators use credit data furnished by the three credit bureaus – Equifax, Experian, and TransUnion. The algorithm used in the calculation uses different modelling techniques like machine learning, trended credit data, and NCAP (National Consumer Assistance Plan) optimization. The following metrics are used in the calculation of the VantageScore:
Your payment history reflects how you have repaid your outstanding credit balances. This metric is the primary factor that influences your credit score. As such, timely and full repayments are essential for a favourable VantageScore.
Age of credit measures the duration over which you have been using credit in any form. If you have been using a credit card or have a long-standing loan, your VantageScore would be favourable. Customers who are new to credit, on the other hand, usually have low scores since their credit data is limited.
Types of credit means the types of debts you have availed yourself of – revolving credit or instalment loans. A healthy mix of both is good for the calculation of the score.
The credit utilisation ratio measures the percentage of credit you have used against the total credit limit allowed. A low ratio is good as it shows limited credit consumption, while a high ratio negatively impacts your VantageScore.
‘Total credit balance’ measures the outstanding debt that you have. The lower your debt, the better your score will be, and vice versa.
A recent loan or credit card application will negatively impact your VantageScore.
The available credit limit is the aggregate credit limit on your credit cards and loans. The higher the limit, the better your score, and vice versa.
Since it was introduced, VantageScore has had various versions. The first types of VantageScores were VantageScore 1.0 and VantageScore 2.0. Both these versions measured your creditworthiness using a range between 501 and 900.
However, newer versions have been developed now. They include VantageScore 3.0 and VantageScore 4.0, both of which are used currently. Let’s have a look at the primary differences between these two types of scores:
Trended data, like historical credit utilisation and payment history, do not impact this score
Trended historical credit data might impact this score
Does not consider paid collection accounts
Does not consider the following accounts:
Moreover, a limited weightage is given to medical collection accounts compared to other types of collection accounts
A tax lien or judgement can have a considerable impact on this type of VantageScore
A tax lien or judgement impacts VantageScore 4.0, but the severity is lower compared to VantageScore 3.0
While VantageScore varies from 300 to 850, it can be categorised into different ranges that measure your score on a spectrum from very poor to excellent. Let’s have a look at these ranges:
300 to 499
500 to 600
601 to 660
661 to 780
781 to 850
Just like a high credit score is beneficial, a high VantageScore also has various benefits. A high VantageScore indicates that you are creditworthy and can repay your debts on time. This allows you to avail yourself of multiple benefits. These benefits are as follows:
You can reduce the premium payable for your insurance policies, especially for car insurance plans.
You can reduce the interest rates on your credit cards and loans.
You can easily become eligible for any credit facility.
You can enjoy higher credit limits on your credit cards. Moreover, when your VantageScore is high, you can avail yourself of a higher quantum of loan for your financial needs.
When looking for mortgage loans, you would have more housing options to choose from.
You can get hassle-free utility services without higher security deposits or collateral.
Having a good VantageScore is important if you are looking for any credit facility. A good score helps you achieve the following:
Makes you eligible for the loan or credit card
Helps you negotiate the interest rate on your debt
Gets higher loan amounts sanctioned
Moreover, a good score also impacts other aspects of your financial life, such as insurance policies, availability of loans, etc.
Therefore, it is essential you maintain a good VantageScore at all times.
Your VantageScore is affected by various factors, including:
Repayment history, i.e., when you repay your utility bills and debts. If you pay off your bills and liabilities in a timely manner, you will have a good repayment history, enhancing your VantageScore. On the other hand, if you default on any of your payments, your score will be adversely affected.
A higher credit utilisation rate also damages your VantageScore. You should, thus, try and limit your credit usage.
A lower credit limit and higher existing debts damage your VantageScore.
Making too many loan applications within a short period is not wise as it damages your VantageScore.
Having only one form of credit in your portfolio is also detrimental to your VantageScore.
Improving your VantageScore is quite simple. Here are a few tips:
Pay your bills on time, without any defaults
All your loan instalments and credit card payments should be done in a timely manner
If you might default on your payment, inform the lender and try to arrange for an alternative so that your VantageScore is not affected
Try and keep your credit utilisation rate low, below 30%
Have a diverse mix of credit facilities in your portfolio
Keep old credit accounts open
Do not make too many credit applications within a short time
Your VantageScore is also an important criterion when you are looking for credit facilities. Understand what this score is all about, how it’s calculated, and what affects it. Try and maintain a high score to get credit on the most favourable terms.
The three main credit bureaus in the US – Equifax, Experian, and TransUnion – allow free VantageScore calculations. You can check your score with any of these agencies. Alternatively, some online financial platforms also allow you to check your VantageScore free of cost.
One of the main differences between VantageScore 3.0 and VantageScore 4.0 is that while trended data does not impact VantageScore 3.0, it can have an impact on VantageScore 4.0.
Moreover, compared to VantageScore 3.0, VantageScore 4.0 does not consider medical collection accounts below 6 months. Medical collection accounts in general are also given less weightage in the calculation of VantageScore 4.0. Lastly, a tax lien or a judgement affects VantageScore 4.0 less severely.
A VantageScore of above 661 is usually considered to be good. Scores between 601 and 660 are considered fair.
FICO scores are agency-specific, while VantageScores are calculated by all three main credit agencies in the US. A FICO score of 670 and above is considered good, while a VantageScore of 700 or above is considered good.
FICO scores and VantageScores are also calculated differently. Though the same metrics are used, their weightage differs.