Vol 6 No. 48 -August 23, 2006

A new method to determine credit risk

By Louise Bolger

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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