An external credit scoring model is a system created by third-party companies—not your bank—that predicts how likely you are to repay loans. These models are sold to lenders who use them to quickly and consistently assess a borrower’s creditworthiness. The two primary external credit scoring models in the U.S. are FICO® Scores and VantageScore®.
How External Credit Scoring Models Work
These models analyze the information in your credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—to calculate a credit score typically between 300 and 850. The higher the score, the lower the perceived lending risk.
Key factors influencing your score include:
- Payment History: The most significant factor, representing whether you pay your bills on time. Late payments, collections, or bankruptcies negatively impact your score.
- Amounts Owed (Credit Utilization): This measures how much credit you’re using compared to your total available credit. Experts advise keeping your credit utilization below 30%.
- Length of Credit History: Models consider the age of your oldest and newest accounts and the average account age. A longer, positive credit history can boost your score.
- New Credit: Frequent recent credit applications may lower your score as it might indicate financial stress.
- Credit Mix: Lenders like to see you manage different types of credit responsibly, such as credit cards and installment loans.
Comparing FICO and VantageScore
Both FICO and VantageScore consider similar data but weight these factors differently. For example, FICO places the most weight on payment history (35%) and amounts owed (30%), while VantageScore gives greater influence to credit utilization and credit mix.
| Factor | FICO Score Weight | VantageScore 4.0 Influence |
|---|---|---|
| Payment History | 35% (Most Important) | Moderately Influential |
| Amounts Owed | 30% (Very Important) | Extremely Influential |
| Length of Credit History | 15% (Important) | Less Influential |
| Credit Mix | 10% (Less Important) | Highly Influential |
| New Credit | 10% (Less Important) | Less Influential |
Lenders rely on these standardized models because they expedite decision-making, improve fairness under credit laws like the Equal Credit Opportunity Act, and provide consistent risk assessments.
Common Misunderstandings
- You don’t have just one credit score; multiple scores exist depending on the model and lender’s criteria.
- Credit bureaus collect your credit data but don’t calculate your score; scoring companies run the algorithms.
- Closing old credit accounts may harm your score by reducing your credit age and increasing utilization ratio.
FAQs
Why might the score I see online differ from my lender’s? Scores vary based on the scoring model used, the credit bureau data pulled, and the timing of the report.
What’s the difference between an external and an internal credit scoring model? External models like FICO and VantageScore are sold to many lenders, while internal models are custom-built by specific institutions using additional data.
Can I access the exact formula for my score? No, these algorithms are proprietary. However, maintaining timely payments, low balances, and diverse credit types can help your score.
For more details on credit scores and reports, visit ConsumerFinance.gov’s guide on credit scores.
