You hear about credit risk scores all the time on TV, websites, credit card promotions in your mail and even on your cell phone apps, so you already know how much of an impact they make on your rental decision process. However, do you know the differences between each scoring model? Use our guide below to understand how your applicant’s credit risk score might vary between each scoring model and which one is right for you.
FICO (The Fair Issac Company)
Well recognized by its acronym, FICO is a nationwide risk score developed by the Fair Issac Company. Scores range from 300-850, depending on how the applicant’s credit profile is analyzed. For example, a FICO score formula used for tenant screening won’t be the exact same model used for mortgage lending. While Fair Issac has had a lot of different scoring models (modified throughout the years), their credit scoring model is most recognizably used by the banking industry. Experian, Equifax, and Trans Union work with Fair Issac and license these score algorithms as a part of their report.
The Pros and Cons
The FICO model is so common and a household name; companies will often simply refer to the score as “FICO” without addressing the fact that the Fair Issac Company has numerous scoring models. Even though they may use the same 300-850 range, the information it is based on and the way the score is weighted may significantly impact the final product. For example, banks such as a Chase now offer clients a free FICO score, but the score will likely be higher than what would be calculated for a rental applicant because the bank is using it as a motivator for clients to request more loans.
Developed directly by the three major credit bureaus, VantageScore 3.0 is a nationwide risk score developed to be a more versatile and accurate model. It has the same credit range as FICO (300 – 850), but has the ability to return a score on over 30 million more consumers because it can better analyze thin credit files. Thin credit files are consumer reports containing limited information due to the applicant’s age or lack of credit history; something that FICO still has difficulty analyzing.
The Pros and Cons
As a newer credit model, VantageScore 3.0 is not as recognizable to applicants as the FICO score. That being said, it has massive potential as a trustworthy risk score. Since it was developed directly by the three major credit bureaus, the scoring model can be continually improved using the credit bureaus’ credit data. This means VantageScore 3.0 has the potential to be modified and improved more frequently than FICO, and with complete involvement by the people who own the data. Another added plus is that paid medical debts do not adversely affect the consumer.
Other scoring models
As a non-standardized scoring model, other risk score models can have a variation of ranges: from numbers, letter grades or even basic decision comments like “approved” and “denied”. Each scoring model algorithm is proprietary to each company that develops it. This means that there are differences not only in the credit scoring formula in each non-standard model, but in the way they analyze credit data.
The Pros and Cons
When it comes to non-standard scoring models, you should be cautious. As each non-standard scoring model company analyzes credit data differently, there’s the possibility for inconsistencies in how the data is treated compared to what you might be used to. There’s also the risk that the score might be skewed in a particular direction to better suit the company’s interests. An example would be if a questionable background screening company encourages product add-ons so you’ll obtain a more accurate credit or background profile. While a potential benefit to a non-standard scoring model might be the overall price of the service, you ultimately risk having average or low-quality background information backing your rental decision.
When it comes to choosing what tenant screening services to use, make sure to analyze what credit risk score model they utilize in their report. You should be aware of whether your reports use a score from FICO, VantageScore 3.0, or a company specific risk score. You deserve the best quality data to back your rental decisions. Because how else will you get your dream tenants?
Which credit scoring model do you currently use and is there one you wish you used? Or, have you been tricked by fake scoring models before? Let us know your experiences in the comments section below!