The VantageScore: A New Credit Scoring System

By NEMAL PERERA
creditguard.org
Posted Mar 31 2006, 6:30 PM EST

The new 'VantageScore' created in collaboration by the three major credit bureaus; Equifax, Experian and TransUnion will be available to lenders in the coming few weeks. However, consumers may have to wait until the end of this year to find out what their new credit scores are. According to the credit bureaus, the new credit score will simplify the credit application process by providing lenders with a more accurate and consistent credit score among the three bureaus.

Old Score Versus New Score

In the past, the three credit bureaus used diverse formulas to calculate customer credit scores. As a result, lenders needed to generate three different credit scores from each of the bureaus resulting in contradictory scores. To add to this confusion, the lenders have another credit score option called the FICO score, designed by the Fair Isaac & Company. The FICO score is widely recognized by the lending industry as one of the most reliable and trustworthy credit assessment systems in the marketplace today.

To minimize the confusion, the three bureaus have collaborated and designed the new VantageScore to offer lenders and consumers with a more consistent credit score. To achieve this objective, all three bureaus are planning to use one particular credit calculation formula. As a result, an individual's credit score will be within the same range amongst the three bureaus. This rare collaboration is also seen by analyst as a marketing strategy to take market share away from the Fair Isaac & Company.

Making the Grade

To differentiate themselves from the traditional FICO score format, the credit bureaus have adopted a new credit-grading scale, which is similar to our academic grade structure. For instance, a consumer who has a

credit score of 901 or higher is considered as a low credit risk and receives an 'A' grade. Likewise, a consumer who scores 600 or lower is considered a high credit risk and is given an 'F'.

In contrast, the Fair Isaac & Company assigns consumers a credit score from their traditional rating scale, which ranges from 300 to 850. In the FICO scale, a rating of 700 or higher is considered as a good score while a rating of 760 or better is an exceptional score. Consumers with a FICO score of 600 or below are regarded as high credit risks.

How it Affects Consumers?

As consumers, the new VantageScore will improve our understanding of the credit score structure due to the simplicity and uniformity of the new credit-grading scale. In addition, the sheer competitiveness between the credit bureaus and the Fair Isaac & Company might increase the customer service quality levels of these institutions while decreasing their overall fees. Hopefully, the newfound quality frameworks will motivate these institutions to reduce the overall incorrect account information on our credit files, hence increasing our credit scores.

In a contrasting view, the new credit-grading scale will further confuse lenders and customers who now have to deal with two extremely different credit scales. For instance, a consumer who has a VantageScore of 770 is considered as a high-to-average credit risk while a consumer with the same FICO score is considered as a low credit risk.

In general, the new VantageScore will do nothing to improve customer credit standings or lender analysis of credit risks. It is more like a new recipe, but with the same old ingredients. Consumers who have short credit history, past due payments, liens and bankruptcy on their credit files will have to pay the same high interest charges under the new scoring system.

CreditGUARD of America is a non-profit credit counseling agency that assists consumers through debt counseling and financial education. Please visit our web site at www.creditguard.org or call 1-800-867-0406 for a free consultation with a certified credit counselor.

If you have any questions or comments regarding this press release, please email Nemal Perera at nemal@creditguard.org.