Yesterday the Federal Housing Finance Agency (FHFA) approved two new credit scoring models for use by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that guarantee most of the mortgages made in the U.S.
Both agencies are now authorized to use the FICO 10T credit score model and the VantageScore 4.0 credit score model, as opposed to relying on the classic FICO scoring model that’s been the standard for nearly two decades. The goal is that these two new models will help improve accuracy by taking into account borrowers’ full payment histories and factoring in rent payments, utilities, and telecom payments.
In addition to these new scoring models, the FHFA announced a change in credit reporting requirements for lenders. Currently, Freddie Mac and Fannie Mae require that lenders provide credit reports from all three consumer reporting agencies—TransUnion, Equifax, and Experian. Instead, lenders will have to provide credit reports from just two of the three agencies.
What’s the difference between FICO and VantageScore?
Both FICO and VantageScore provide consumers with three-digit credit scores based on information in their credit report. Lenders look at this number (along with a lot of other factors) when deciding how likely it is that you’ll repay any money you borrow. While many consumers don’t know the difference between Vantage and FICO, these competing scoring models vary slightly in how they are calculated and the ranges they provide their customers.
FICO categorizes credit scores from poor to exceptional, with scores above 670 considered “good” and scores below 580 considered “poor.” VantageScore credit scores can fall within a few different categories, ranging from subprime (300–600) to superprime (781–850). The higher your score, the better.
Both scoring models consider factors like payment history, amounts owed, how much credit you’re using, new credit inquiries, and credit mix. However, each scoring model assigns slightly different weights to these factors when calculating your overall score.
Maintaining a good credit score across both scoring models will require you to practice positive credit habits like making on-time payments, keeping your credit utilization under 30% of your available credit, and being selective about new credit applications.
What does this change mean for homebuyers?
Your credit score plays a huge role in your ability to secure a mortgage and favorable terms like a low interest rate. Ideally, these new credit scoring models will help even the playing field for borrowers with thinner credit profiles. The hope is that potential homebuyers, across income levels and races, should have better access to mortgage products.
A 2021 report by the Urban Institute found that Black and Hispanic Americans are more likely to have no or low credit and are more likely to be renters. This more robust credit-scoring model could help create an easier path to homeownership.
“Today’s decision will benefit borrowers and the Enterprises, along with maintaining safety and soundness,” said FHFA director Sandra L. Thompson. “While implementing the newer credit score models is a significant change that will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers.”
3 easy ways to check your credit score
There are several ways you can check your credit score, and you should get into the habit of monitoring it regularly—especially if you have a big purchase on the horizon.
- Use a credit scoring service or site: Platforms like Credit Karma or Credit Sesame are free to use and can give you regular updates on your score and any major changes.
- Request your score from one of the major credit bureaus: Experian, TransUnion, and Equifax all offer consumers access to their credit scores through credit monitoring products—although some may require you to pay a fee.Experian Boost is a free product that allows you to track your credit score and can help you raise your FICO score since it connects to your bank account and gives you credit for paying everyday bills, like your utilities or rent, on time.
- Check with your bank or credit card issuer: American Express, Chase, Capital One, and a number of other banks offer free credit scores, even for consumers who are not cardholders.
Different products allow you to check different scores—you won’t see both your VantageScore and FICO in the same place, so you may want to look on multiple platforms to make sure you have all the info you need. Your credit score plays a key role in the likelihood that you’ll be approved for financing, as well as what it costs you to borrow that money. Knowing your credit score and how lenders are evaluating it is key to hitting all of your major financial goals.
FAQs
Use more precise risk assessments – By taking into account trended data and alternative credit data, FICO 10T and VantageScore 4.0 provide a more accurate look into an applicant's credit risk. Thus, they may help mortgage lenders make better lending decisions and improve their portfolios.
What are the two main credit scoring models? ›
The best credit scoring model depends on the lender and borrower's needs. FICO and VantageScore are the most commonly used in the US, based on factors such as payment history, credit utilization, and credit inquiries. However, credit scoring models are only one factor in credit decisions.
What is the new credit scoring system? ›
The FICO Score 10 Suite is the newest FICO credit scoring model, consisting of two scores: FICO 10 and FICO 10T. The FICO 10T credit score includes trended data, which looks at individual consumers' payment and debt history for the previous 24-plus months to help calculate their credit scores.
What is one of the new credit scoring models that FHA is implementing? ›
On October 24, 2022, FHFA announced the validation and approval of two new credit score models, FICO 10T and VantageScore 4.0, for use by the Enterprises.
What are the two main credit scores used by lenders? ›
VantageScore and FICO are two of the most commonly used credit scores. But they're not the only ones. Some lenders have their own custom credit-scoring models that they use to make credit decisions, according to the CFPB.
What are the two most popular scoring models? ›
FICO and VantageScore are two widely used credit scoring models that help lenders determine your risk as a borrower. They're also often used by landlords, utility companies, and even employers to evaluate your history with borrowing money and paying bills.
What scoring model is used for mortgages? ›
The credit score used in mortgage applications
While the FICO® 8 model is the most widely used scoring model for general lending decisions, banks use the following FICO scores when you apply for a mortgage: FICO® Score 2 (Experian) FICO® Score 5 (Equifax) FICO® Score 4 (TransUnion)
What is the new credit law in 2024? ›
Significantly restrict the use of credit reports for non-credit purposes, including tenant screening, employment, insurance, and immigration purposes. Give Americans better control of our own data, such as an automatic security freeze that would require consumers to affirmatively consent to use of their data.
How rare is a 750 credit score? ›
A 750 FICO® Score is above the average credit score. Borrowers with scores in the Very Good range typically qualify for lenders' better interest rates and product offers. 25% of all consumers have FICO® Scores in the Very Good range.
How to get a 900 credit score? ›
But, for a general credit score, getting a 900 is not possible or relevant. If you are looking to get the perfect score of 850, simply maintain good credit behavior by keeping your credit balances low, paying all your bills on time, and keeping debt as low as possible.
The primary credit scoring models are FICO® and VantageScore®, and both are equally accurate. Although both are accurate, most lenders are looking at your FICO score when you apply for a loan.
What is the new credit score for FHA loan? ›
FHA loans allow borrowers with a credit score of 580 or above to purchase a house with a down payment as low as 3.5% of the purchase price. Borrowers with credit scores between 500 and 579 need at least 10% down. Keep in mind, these are the minimums set by HUD, but lenders may have their own minimums.
What are the new FHA terms? ›
Down payment: The minimum down payment required for an FHA loan is 3.5% of the purchase price. Borrowers with credit scores below 580 may need to make a larger down payment. Debt-to-income ratio: The maximum debt-to-income ratio (DTI) allowed for an FHA loan is 43%.
Which credit scoring model is best? ›
The FICO scoring model is an algorithm that produces what is considered the most reliable credit scores. About 90% of lenders use FICO's model to evaluate candidates for credit.
Do lenders still use FICO 2? ›
While most lenders use the FICO Score 8, mortgage lenders use the following scores: Experian: FICO Score 2, or Fair Isaac Risk Model v2. Equifax: FICO Score 5, or Equifax Beacon 5. TransUnion: FICO Score 4, or TransUnion FICO Risk Score 04.
What are the two types of credit scoring systems? ›
Your credit score is calculated based on the activity on your credit reports, provided by the three credit bureaus — Experian, Equifax and TransUnion. The two most widely used types of credit scores are FICO Score and VantageScore.
Why is my FICO score different from my VantageScore? ›
Because VantageScore was created by the three credit bureaus, it uses a tri-bureau model that works with a credit report from any of the three credit bureaus. Meanwhile, FICO creates and uses a credit-scoring model that is unique for each of the credit bureaus.
Do lenders look at FICO or Vantage? ›
Mortgage lenders typically use FICO® Scores☉ from each credit bureau to help determine your loan eligibility and terms.
What are the 2 types of credit score calculation used by credit bureaus? ›
Your credit score is calculated based on the activity on your credit reports, provided by the three credit bureaus — Experian, Equifax and TransUnion. The two most widely used types of credit scores are FICO Score and VantageScore.
Why is my FICO and CreditWise score different? ›
FICO uses Equifax, whereas CreditWise uses TransUnion. Checking your score on different platforms can result in differing scores.
