Vol 6 No. 48 -August 23, 2006
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A new method to determine
credit risk
By Louise Bolger
SUN STAFF WRITER
If the term "credit score" recently became
part of your financial vocabulary, you’re a full economic
generation behind. The latest buzz word in the world of credit
scoring systems is VantageScore.
As most of us know, the most important thing is to have is a
good credit rating if you want to borrow money, especially if
it’s major money as in a home mortgage. The three credit
bureaus, Equifax, Experian and TransUnion who track and grade
consumer credit, have now come up with an additional formula
to determine credit risk. They claim, this innovative new approach
simplifies the credit granting process for consumers and creditors
by providing a consistent objective score, with the ability
to classify more bad accounts into the worst-scoring ranges.
VantageScore scores resemble your elementary school report card:
901-990 equals an A, 801-900 equals a B, 701-800 equals a C,
601-700 equals a D and 501-600 equals an F. I was surprised
to read that the national average is only 736 and the state
of Florida is 727 – both C scores, I guess I had more faith
in Americans to manage their finances. Traditional FICO credit
scores run between 300 to 850, so adding another number in the
life of a consumer runs the risk of further confusing an already
confused public.
The factors contributing to the VantageScore are broken down
as follows: 32 percent payment history, 23 percent utilization
of available credit, 15 percent credit balances, 13 percent
length and depth of credit history, 10 percent recently opened
credit accounts and 7 percent available credit.
Basically if you have a good FICO credit score you will probably
also have a good VantageScore. In addition, if you have what
lenders call a "thin" credit history, that is few
accounts and a short credit history, you can still get a pretty
high FICO score. However, VantageScore claims it do es a superior
job of evaluating thin credit, which could be good news for
lenders but bad news for young people trying to establish a
credit history.
Everyone is entitled to one free credit report each year from
each credit reporting agency, something I would definitely recommend
in order to determine the accuracy of the information. This
free report does not include your FICO score, and, of course,
it does not include the new VantageScore, but both can be purchased
online for a fee. The FICO score can be purchased from any of
the three credit reporting agencies for between $5.95 and $7.95.
The VantageScore can be purchased from Experian for $5.95.
Curiosity got the best of me, and I decided to go for the $5.95
to see what my VantageScore was. Experian’s Web-site www.experiandirect.com
was extremely easy to use with quite a bit of interesting financial
information. You simply fill out a quick online form, they ask
you a few personal questions regarding your credit history to
verify you are who you say you are, give them a credit card
number, and within a minute you have your personalized report
with your credit category, grade and your percentile as it relates
to all other U.S. consumers.
In addition, the site has a score illustrator which demonstrates
how you can improve your score, and what the negative impact
of certain credit practices will have on your score. Some of
it is quite surprising.
Since so much of what we do as consumers is based on our credit
ratings, so knowing your scores is an important thing to keep
track of. For a relatively small amount of money you can be
prepared before you fill out the application for a new car loan
or try and get insurance for the car. By the way, I’m delighted
to say my VantageScore was an A, in case anyone out there wants
to float me a loan.
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