Credit Score Ratings Are Changing

The winds of change are upon us, some would say. This seems to be so given the economic situations that are forcing many people to make decisions they’ve never had to make before. Change can be good or bad and sometimes only time will tell what the outcome will be. This may be the situation with consumer credit score ratings. Change is coming and no one is for sure whether it will be good or bad.

The FICO model for credit scoring, created by the Fair Isaac Company, has been in use for over fifty years. The three credit reporting bureaus, Equifax, Experian, and TransUnion, have been using this fico score number to assess the lending risk of consumers, and lenders have employed this scoring method as well. However, a new scoring method has been developed, called VantageScore.

Consumers have experienced discord between the three major credit reporting companies for sometime now, ranging from discrepancies in credit scores, credit history, and even demographic data. Finally, these three companies have come together to create a new credit scoring model that they will place in direct competition with the FICO model. This new credit scoring model, VantageScore, was developed in 2005 and released in 2006. Why create a new model? There are several reasons for a change. First of all, the three major credit bureaus wanted a more consistent score that could predict consumer lending risk. Before, the credit bureaus could have the exact same information for a consumer and still produce a different credit score using the FICO model. VantageScore poses to be more predictable and consistent. Also, VantageScore is meant to be more easily understood than the FICO score. Instead of an arbitrary score range of 300-900, the VantageScore sets a range of 500-900, following a typical public school grading system. For example, a score in the 800 range would be a “B” score, whereas a score below 700 would be “failing”. Of course, the higher the number, the greater the credit-worthiness. Lastly, VangageScore was created to end the monopoly that the Fair Isaac Corporation had on the credit market. Though the FICO score will still be offered, lenders and consumers will have the ability to choose between the FICO score and VantageScore.

The creators of VantageScore observed the flaws of the current credit scoring method and sought to correct them. For example, the FICO model is not efficient at evaluating risk of consumers with little or no credit, whereas VantageScore is programmed to assess these situations properly. Also, the FICO score does not effectively evaluate new lending practices that have developed in recent years. On the other hand, VantageScore was specifically developed to address the current economic changes, spending habits, and increased debt common in society today.

So how might VantageScore help you? Credit score reporting will be consistent across the three credit bureaus. Previously, the variables between the three credit bureaus created inconsistencies in credit reports and credit scores. VantageScore uses characteristic leveling, a process that establishes equity between the characteristics so that all data will be interpreted in the same manner. This means that confidence in the accuracy and consistency of the credit score will increase, no matter the data source that it came from. Also, the score will be primarily based on the previous two years of the consumer’s credit history, which can be good news for anyone trying to get out of a bad credit rut.

This change may not be all good though. There is a possibility that negative repercussions may result. First of all, VantageScore is the product of a private company, VantageScore Solutions, LLC. Therefore, the creation of this new scoring method was not necessarily for the benefit of the consumer and the best interest of the consumer may not always be the company’s primary goal. Additionally, lenders who decide to adopt VantageScore may be wary of its reliability at first. This may mean that credit and loans will be more difficult to obtain until the lenders are able to see for themselves how reliable this process is.

Just when you finally began to understand your FICO score, the rules of the game changed. At this point, no one can tell how popular this new scoring method will become and whether it will replace the FICO model or merely offer a bit of competition to the Fair Isaac Corporation. No matter what method the credit reporting companies decide to use, the rules of maintaining good credit will still apply. Change is inevitable, but you can decide whether you can benefit from that change or not. Only time will tell if VantagScore will be a positive change, a negative change, or a negligible one, but either way, be prepared.

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