There was a time when your credit score was a pretty straightforward concept. It was one number, and the higher it was, the better off you were, at least from a borrowing perspective. You have probably noticed that these days, in addition to your FICO® score, you may now have a VantageScore and even an UltraFICO™ score. Let’s look at all three to decide what you need to worry about (or not).
Equifax®, Experian®, and TransUnion®, the three major credit reporting agencies, combined forces to establish another credit scoring model, the VantageScore. They kept the 350 – 850 scoring range, but how this model evaluates various credit behaviors is somewhat different from the FICO method. For example, both ways consider late payments, credit utilization, length of credit history, etc., but they assign different levels of importance or weight to these criteria.
In 1981, the Fair Isaac Corporation, FICO, created the first credit risk score and quickly became the primary credit scoring company in the United States. Potential lenders want to know how likely we are to pay them back on time whenever we apply for credit. Before FICO scores came along as a standard way to measure credit risk, individual lenders more or less used their own criteria to determine whether or not to lend you money.
Today, many lenders rely on your FICO score instead. A FICO score is a three-digit number ranging from 350 to 850 (or 900 for some industries), with a higher score indicating better creditworthiness. Many more credit risk models have evolved under the FICO umbrella, so FICO is more of a brand than an individual score these days.
Someone who is just starting out with building a positive credit history can find it challenging to obtain credit without first having had credit. UltraFICO is a new offering from the folks at FICO that can help consumers to start their credit history.
UltraFICO allows consumers to link their checking and savings accounts (which traditionally have not contributed to one’s creditworthiness) to their credit score to show financial responsibility outside of credit products. For example, keeping a positive bank balance and regularly paying your bills are some of the positive behaviors that can build your UltraFICO score.
Working jointly with Experian, UltraFICO scores will initially be available through a limited group of lenders as part of a pilot phase for consumers who may not have access to credit or who might be eligible for better credit terms. Following the pilot, the UltraFICO Score is expected to become more widely available.
What does it mean for you?
While it can be confusing to figure out why your FICO score is one number and your VantageScore is a different number, the numbers themselves are not the be-all and end-all. Yes, a higher score is better than a lower score, but the more critical measures of your financial well-being remain the same, regardless of the credit scoring model:
- Do you have enough extra cash on hand (emergency fund)?
- Are you saving enough for retirement?
- Do the bills get paid on time (no late payments)?
- Are you using a strategy to pay off consumer debt quickly?
It is still a good idea to keep track of your credit scores to see if anything unusual might be going on but rather than overfocusing on your exact scores, it might be better to focus on the bigger picture: your overall financial well-being.