Credit scoring is a major factor when approving a borrower for a loan. For the last 20 years, the FICO score has been the scoring system used by the majority of lending institutions. In recent years, credit scores have also been used by home and auto insurance companies to determine rates and by employers to determine the character of employees or applicants. Credit scores can have a major impact on a consumer’s life and financial situation, and can either cost or save him thousands of dollars.
The FICO scoring model was developed by the Fair Isaac Corporation. A consumer’s credit behavior determines the score. Factors that affect the score include account payment histories, types of credit, outstanding debt, length of credit history and recent inquiries. The score ranges from 350-850; 850 being the best rating. Variations in the score often exist between the three major credit bureaus. A consumer may have a 610 with Experian, 650 with Equifax and a 705 with TransUnion. The lenders frequently use the middle score to determine whether a consumer’s credit is approved. Only in recent years have many consumers begun to realize the importance of understanding what a credit score means and what factors affect their score.
On March 14, the three major credit bureaus joined hands to form a company called VantageScore, which has developed a new scoring model. The company claims that its model will help to more accurately grade a consumers credit risk. The new scoring model also uses a new grading scale, which is similar to the letter grading scale we are all familiar with from elementary school. The new scores range from 500-990:
- 901-990 = A
- 801-900 = B
- 701-800 = C
- 601-700 = D
- Under 600 = F
VantageScore has not described details of what factors are used to calculate the credit score, though they will probably be similar to those used by FICO. The company claims that the new scoring model will reduce variations in credit scores among the three credit bureaus by 30 percent. All three credit bureaus compile their own information in consumer credit files and are prohibited by law to share information, which causes variations in credit reports between the three bureaus. Scores only reflect the information in their report; therefore, slight variations in scores will always exist, even with the new scoring system.
VantageScore is currently available to lenders but is not yet available to consumers. Very little information about the new scoring model has been released by the company. Experian is trying to make the new scores available to consumers this summer, and Equifax and TransUnion will follow shortly afterward.
Some controversy exists over the new scoring system. Some consumer advocacy groups say that the new scoring system will complicate things for consumers who are already confused about how the current scoring system works. Other consumers and lenders are in favor of trying a new, simplified and more accurate scoring system. There is also the opinion that the new scoring system still fails to correct the problem of inaccurate information being reported on consumer credit reports and that variations will still exist.
Lenders will have the option between using VantageScore and FICO scores, or may even choose to utilize both scores in assessing the risk associated with a potential borrower. For lenders, the new scoring model may lower the price of the credit scores due to competition in the marketplace. It is also said that the people with less credit history or younger consumers new to credit will be more accurately evaluated under the new scoring model, which could benefit lenders during the underwriting process.
Overall, despite which scoring system is used, the ultimate determination of the score lies with the consumer and his credit behavior. A consumer’s credit behavior is compiled and reflected in the credit reports. The scores only summarize and measure what information is contained in the credit reports, so consumers should continue to concentrate on good credit behaviors, such as paying bills on time, keeping balances low, building credit and keeping inquiries to a minimum. It is also important for consumers to check their credit reports frequently to correct errors and prevent fraud, or just to have an understanding of where they stand and what they can do to improve and maintain a better credit rating for the future. A consumer can save thousands of dollars by improving his credit rating and practicing good credit behaviors.
Consumers can contact a reputable credit restoration company to assist them with improving and maintaining a better credit score. Credit restoration companies assist clients with improving and maintaining their credit rating, as well as helping consumers to understand credit, how it is scored and how their behavior affects their score. This can be extremely beneficial to many consumers who feel left in the dark about their credit. It may be beneficial for you to refer your potential clients who need some assistance with score improvement to a credit restoration company. Choose a company that will work with you, keep you updated and send the client back to you for financing when they have completed their service. In the end, your client improves his credit, gets the loan he needs and may have changed his life for many years ahead.