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All about Your Credit Score Scale

mombo | Oct 16, 2009 |

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If you've just been denied a loan or are looking to borrow a good amount of money, it might be a good idea to know about the credit score scale. Just as important as the scale itself, it's important to know how it is formulated, and the different formulas used to calculate credit score scales. For those who are wondering, there are several variables that go into a credit score scale, but hopefully we can clear the air on this subject.

Typically, credit bureaus use two separate formulas to derive a credit scores scale. The well known FICO score is the primary formula, but also the important yet lesser known formula is the Vantage Score. FICO is so well known, because it was used as a main criterion for determining whether lenders would grant mortgage loans under Freddie Mac. Later, Fannie Mae also adopted the use of the FICO score as a determinant for mortgage loans. So, all throughout the 90's the FICO score was the main formula used in the mortgage industry. However, starting in 2006, credit bureaus decided that they needed another metric to measure credit worthiness so they began using the Vantage Score. Now, this leaves us wondering what is considered a good credit score.

The FICO score typically starts its credit score scale at roughly 300 and goes as high as 850. Again, some speculate that the older FICO score carries more weight in the overall credit score. The Vantage Score starts at 500 and goes to 990. Although the FICO score has a wider range in possible scores, it actually uses fewer variables than the Vantage Score. For example, there are five different factors that go into calculating the FICO score, while the Vantage Score boasts six different variables in its valuation. Let's discuss some of the criterion used to calculate the respected FICO and Vantage Score.

The FICO score uses five separate factors in its formulation. These include an individual's payment history, credit to debt ratio, length of your credit history, what types of credit amounts you have borrowed, and the number newly opened accounts. The Vantage score uses your payment and credit history, credit to debt ratio, length of credit history, category of credit lines, new accounts opened, and how much available credit. Most analysts believe that paying your bills on time is the number one most important reason for a good credit score. Also, analysts believe that you should only use approximately 30 percent of your available credit to maintain a good credit score. Obviously, the less credit you use, the better off you'd be in this category.

It is very important to understand the different factors that go into calculating your score and know what is a good credit score range. One wrong move could be fatal to your financial future and ability to borrow. Hopefully, knowing these factors will enable you to keep a good credit score and possibly improve your credit score.