Different Types of Credit Scoring Models You Must Know

Availing of credit becomes easy when you have a good credit score. Your credit score is a three-digit number between 300 and 900 that indicates a borrower’s creditworthiness and repayment capacity. The higher a borrower’s credit score, the better their chances of getting approved for a loan quickly as well as getting it on beneficial terms and conditions. In India, most lenders require borrowers to have a credit score of 750 or above to be eligible for a loan.

Four credit information agencies are authorised to collect information on borrowers and how they use credit and assign credit ratings or scores based on this information. These credit rating agencies or credit information bureaus are Experian, Equifax, CRIF High Mark and TransUnion CIBIL. Every credit information bureau works closely with lenders and other financial institutions. However, every credit rating agency also uses a different credit score model. Read this article to discover more about the different credit score models.

Different Types of Credit Score Models and How They Work

1. FICO Credit Score Model

FICO stands for Fair Isaac Corporation. The Fair Isaac Corporation is a U.S.-based data research or data analytics company founded in 1956. Though FICO offers various types of products and services to borrowers, it is best known for the services related to consumer credit scores that the company provides. The FICO credit scores range between 300 and 850, with 850 being the highest credit score and 300 being the lowest. If your credit score ranges between 670 to 739, under the FICO rating system, your credit score will be considered good. Anything above 740 is considered excellent and anything between 580 and 700 is considered fair. With a low FICO score, availing of credit becomes difficult.   

Here’s How FICO Calculates An Individual’s Credit Score

FICO calculates an individual’s credit score based on five different factors. Let’s read about them.

• Payment History – In the case of the FICO credit score model, the payment history is the factor that impacts the credit score the most; it holds 35% weight. Therefore, borrowers who pay their credit card bills and EMIs on time automatically have a good credit score under FICO.
• Amount Owed- In the case of credit cards, the amount owed refers to the credit utilization ratio and in the case of loans, it refers to how many loans you have pending and what the amount left to be repaid is in the case of each loan. The amount owed makes up 30% of one’s credit score and therefore, it is another important factor that affects credit ratings under the FICO system.
• Length of Credit History- Under the FICO system, the length of the credit history makes up 15% of one’s credit score. In general, the longer one’s credit history, the better the credit score. This is the reason why borrowers are asked to never close old loan accounts as doing so wipes out one’s credit history.
• New Credit – Borrowers must apply for loans only when they need them. This is because every time they apply for a new loan or credit, it generates a hard enquiry and too many hard enquiries are detrimental to one’s credit rating under FICO. New credit applications and hard enquiries resulting from them make up 10% of one’s FICO credit rating.
• Credit Mix – Lastly, the credit mix one has is also important as it makes up 10% of one’s credit rating. Borrowers must therefore always try their best to maintain a balance of secured and unsecured loans.

Also Read: Credit Mix: Different Types of Credit that Boost Your Credit Score

2. VantageScore Model

Until 2006, the FICO credit model was the only credit scoring model available. In 2006, Experian, Equifax, and TransUnion came together to build another credit scoring system called the VantageScore Model. Today, though the FICO scoring model continues to be the most popular, the Vantage scoring model is also gaining popularity. Under this model too, credit scores vary between 300 and 850. The biggest advantage of this system is that under this credit scoring system, consumers can access their credit scores for free.

Here’s How the Vantage Score Model Works

The version of the VantageScore determines how your score is calculated. While VantageScore 3.0 is a well-known model, credit bureaus launched VantageScore 4.0 in 2017. Under the VantageScore 4.0 Model, the following factors affect the borrower’s credit score: 

• Payment History: The payment history is the most important factor that affects a borrower’s credit score. Under the VantageScore 4.0 model, the payment history carries 41% weight. It is calculated based on how diligently you have paid your bills. 
• Depth of Credit: The depth of your credit is determined by the age of the credit accounts, including your average, oldest, and newest accounts. Older accounts help improve your score and allow lenders to thoroughly evaluate how borrowers have handled credit. It makes up 20% of your credit score.
• Credit Utilisation: With a weightage of 20%, this factor looks at the amount of credit you have used and the amount of credit you have access to. 
• Recent Credit: Every time you apply for new credit, the lender conducts a hard inquiry to assess your creditworthiness. The recent credit history considers the is the number of credit accounts you have opened and the number of hard inquiries. It makes up 11% of your credit score. 
• Balances: This looks at the total balances remaining on all your credit accounts. High balances can decrease your credit score. It accounts for 6% of your credit score. 
• Available Credit: It makes up 2% of your credit score. This factor considers how much credit you have available on your revolving credit accounts. 

Now that we know about the two popular credit scoring models, let us look at how one can check their credit score.

Here’s How a Borrower Can Check Their Credit Scores

These days, it has become quite easy for borrowers to check credit scores. There are many websites that offer this facility for free. So, you can get your free credit score at any time with the help of these websites. However, if you are checking your credit score because you wish to apply for a loan, it is suggested that you get your report directly from one of the four credit information bureaus.

The process of checking credit scores this way is quite simple. All you must do is fill out an application form and choose a subscription plan. Based on the subscription plan you have chosen, you will be required to pay a fee. Pay the fee and you will have your credit report in your email in no time.

Also Read: How to Check, Calculate, and Boost Your CIBIL Score?

Final Words

If you are planning to apply for a Home Loan or credit card, you should evaluate your credit score in advance as your credit score can get your loan approved or rejected. Further, all borrowers must also try to understand the different types of credit score models and how they work as this information proves helpful in helping people build and maintain a good credit score.