Two credit scoring systems are most used by those who check credit for lending, renting and hiring. The old “standby” is FICO. That’s what people think of when they ask what someone’s score is. It ranges from 300 (never pays anybody) to 850 (just-about-perfect). Then there’s VantageScore. They use the same numbers as FICO. The differences are how they measure someone’s credit worthiness.
The differences are minor but they can be indicators in a couple of ways. First has to do with how long someone must have credit and how many accounts someone must have before FICO or VantageScore will issue a score. Another is how they deal with collections, paid or unpaid. A third is what they consider most important bills. But how valuable is the score itself?
FICO doesn’t score anyone until he or she has at least six months of history. So for a person just starting out in the world, that means FICO may come back with “no record found.” VantageScore on the other hand, puts someone with any credit account in their records after just one month. They have “scoreable” population of 225 million as opposed to FICO’s 190 million partly as a result of that feature. So if someone doesn’t show up with a FICO score, he or she may have one with VantageScore.
Both VantageScore and FICO penalize for accounts sent to collection, but FICO ignores any account of less than $100 and any that are paid. VantageScore only ignores paid collections regardless of the amount. You decide if that’s important to you.
FICO treats all debts equally, but VantageScore puts a premium on mortgage payments. So if someone is late with mortgage payments, that will knock down his or her credit score with them much more than it will with FICO.
Does that mean that one score is preferable to another in judging the worthiness of an applicant? It depends on the type of applicant to be judged. If you hire or rent to young people who may not have much credit experience, certainly VantageScore will provide a better picture. But both will give a rough idea of how well someone will pay his or her bills.
But do you want to rely completely on a credit score. With FICO, people can “game they system.” Experian posted in a blog, that “many borrowers started ‘gaming the system’ by issuing many credit cards, taking on many loans, etc. None of these clearly indicates whether a borrower is creditworthy, and thus, the noise in existing standardized credit scoring methodologies has been increasing over time.”
“Gaming the system” works like this. Both FICO and VantageScore use the amount of credit available as an indicator or creditworthiness but available credit ranks higher with FICO. So if someone has 10 credit cards each with a $10,000 limit but no balance on any of them, that person has a $100,000 credit limit with none of it used. That means the credit score would rise precipitously say moving a 680 score up to 800 (just an example, there’s no telling exactly what the result would be). Nothing to indicate any more responsibility or character, only that he or she could charge up to $100,000, in other words has available credit of $100,000.
And that brings us to the most important aspect of credit scoring. Certainly a credit score is a great jumping off place. If someone has a credit score of 427, chances are your applicant isn’t in the habit of paying anybody. But, other than the obvious, do you need to rely on a score at all? Rather would you do better to go by someone’s “accountability, responsibility, character, personality” and other things that only careful screening can determine? The information on a credit report can tell much more than a score all by itself. Someone who owes lots of money in collections is certainly not the best risk for hiring or renting regardless of the amount of the collections, but how about someone who doesn’t have any bills in collection but has limited credit either because he or she is new to the world or prefers to pay cash and shows promise as a responsible person? That person can be a much better risk than someone who has lots of credit, has a high credit score, but also several dings on his or her personal record.
By Robert L. Cain
