Credit scoring has been a tactic used by lenders for decades to determine the credit worthiness of borrowers. Initially, consumers were unaware that lenders used this strategy until the 90’s when news media highlighted the practice and consumer groups began pressuring lenders to divulge the information they maintained on consumers.
Today it is a well-known fact that each person has some type of credit rating maintained by one of the big three credit bureaus. Even if a person has no credit history, this information is known. Lenders use a variety of models to gauge a person’s credit worthiness and the most well-known is the FICO score created be the Fair Isaacs Company in the 1970’s. This was one of the first, if not the first, credit scoring systems to become available to lenders. It has become the industry’s standard model for assessing potential borrowers. Recently, the Vantage Score has been developed through collaboration among the big three credit bureaus Equifax, Transunion and Experian. This new model is seen as having a more consistent approach and being more reliable than the FICO model.
To fully understand what the Vantage Score is, there are a few basics to cover first. It is important to note that there are many different credit scoring models in use today. So much so that it can be hard to keep track of them all. Each model uses slightly different methods for assessing a borrower’s risk and places different weights on different parts of a person’s history. If you have ever had someone go over your credit report with you, it is easy to see the results of these different methods. For instance one credit bureau may report your score as being a 620 whereas another may say 670 and still another may report a 600. Generally a lender will average out these scores when making a decision to lend you money however reporting can be very inconsistent because of the different methods used by different reporting agencies. Is one method better than the others? Often this question can be answered as a matter of opinion. No matter which method is used, the overall goal is to compress your credit history, or lack thereof, into a three digit score that can be referenced by lenders.
What is a Vantage Score?
With inconsistencies from the FICO score, the big three credit bureaus came up with the Vantage Score so that they could report more consistently to lenders about a borrower’s credit worthiness. This enables them to offer a more standardized or consistent score from the three companies as opposed to the FICO score which was often different depending on whom you talked to. A major hurdle that the Vantage Score faces is its lack of history with lenders. Traditionally, FICO has been a very reliable source of credit information for lenders and it may take time for them to embrace the new scoring model.
There are many differences to the new scoring method along with some important additional features that can help lenders better assess borrowers. For instance the Vantage Score offers predictive scoring and a 24 month snap shot review of credit history. The FICO model does not incorporate these features. Other differences include the following: VS ranges from 510 to 990 whereas FICO goes from 300 to 850. VS uses a letter grade system for 100 point ranges with 901-990 being an A. FICO does not use letter grading. VS takes into account 6 components of a borrower’s history including, payment history, balances, utilization, recent credit, depth of credit, and available credit. FICO uses 5 components including amount of debt, payment history, credit history, inquiries and types of accounts. The Vantage Score purports to score borrowers more accurately with predictive scores for consumers with less history. In contrast, thin file consumers may not generate a score with FICO because of limited history.
The most notable difference between FICO and Vantage Scoring is that VS is based mostly on the past 24 months of a consumer’s borrowing history. Even with the new scoring model, reports can still vary among the three credit bureaus and items appearing on reports may vary. The new scoring method offers lenders a way to assess borrowers in today’s world.
What does the scoring method mean for consumers?
It’s great that lenders have a new and more reliable way of scoring borrowers however what does this mean for people actually borrowing money? For starters, those that have a limited credit history may be able to have more borrowing options when they go to apply for a loan or credit card. With the FICO score, if a borrower doesn’t register as having a score, most lenders see it as worse than a person with bad history. The Vantage Score, which focuses on more recent time periods, will not give these consumers an advantage they didn’t have before.
While the Vantage Score is a good model, consumers should still proactively manage their borrowing habits. Don’t max yourself out in terms of credit accounts. Lenders see it as a bad sign when a borrower is over-burdened with credit accounts. If you are just starting off in your credit career, take it slow by opening on or two credit card accounts. If you already have other accounts like a car loan or personal loan, perhaps one credit card will do. Don’t max out your individual accounts either. If you have a credit card for example, at maximum only spend half of your limit every month if that. Always pay it off every month or in other words, don’t spend money you don’t have. Also, make use of your one time free credit report which you can generally obtain online. This will alert you to anything suspicious happening with your credit so you can respond to it appropriately and in a timely fashion. Some people aren’t aware that someone has fraudulently been using their name until they go to apply for a loan only to find out something bad has been happening.
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