Credit scoring soon may be less complicated, or not...

The FICO credit score is the system most used by lenders to determine whether or not a consumer is worthy of a loan or credit. The proprietary system, developed by Fair, Isaac, and Co., uses a number of factors to create a score - outstanding debt, amount of available credit, past delinquencies and bankruptcies and the overall age of the user’s credit. These factors, and others, are distilled down to a simple, three digit number that ranges from a low of 350 to a high of 850. The higher the score, the better the consumer’s overall credit.

But the simple question of “What is my credit score?” has usually been met with no simple answer. Credit records and reports are maintained by three different credit bureaus - Equifax, Experian and Trans Union. Each of them has always used a different model for determining the credit score of their customers. Because of this, someone who ordered a copy of a credit report from each of the three bureaus would receive three different credit scores. Equifax has used the Fair, Isaac (FICO) model, but Trans Union and Experian have used their own proprietary systems for determining credit scores. The systems were all similar, but they were not identical. This has created a lot of confusion for consumers.

That confusion may soon clear up, or it could get worse. The three credit bureaus recently announced the creation of VantageScore, a new, unified scoring system that will be used by all three bureaus. Soon, consumers who order a credit report from any of the three companies will receive the same score, calculated in exactly the same way. That should clear up some confusion among consumers. Unfortunately, the new scoring system does not resemble the old ones, so that may make things worse.

The new scoring system uses a scale that ranges from 501-990, with 990 representing the top score. In addition to a numerical score, consumers will see a “grade” that corresponds to their score range. 901-990 will receive an A, 801-900 a B, and so on. This will allow people to see, at a glance, how their score is “graded.” The confusion that may result will stem from the completely different scoring scale. A score of 810 on the FICO system is a great score; the same number under VantageScore is a less-spectacular B. Making things worse is the fact that many lenders use, and will continue to use, the FICO model, which is licensed and sold by Fair, Isaac.

The introduction of VantageScore is certainly a welcome change in the industry. There has certainly been a lot of confusion in the past about the different systems and numbers used by the bureaus. It remains to be seen if the industry as a whole will embrace the new system. If it does, things will be easier than ever. If not, then we will continue to have two systems - FICO and VantageScore. Two, at least, is better than three.

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