You do know about credit scores, right? If you don’t, it’s three numbers that just about rule your financial life. The most trusted score, the FICO score, runs from 300 to 850. As you might guess, higher is better. People who have scores of 700 or above can get just about any type of credit, including a mortgage and an auto loan. Those who have scores of 580 or below may have trouble getting any type of credit.
To make matters even more convenient for lenders, credit scores have been divided into ranges as follows.
• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score.
• Between 620 and 679 – Average or OK score.
• Between 580 and 619 – Low credit score.
• Between 500 and 579 – Poor credit score.
• Between 300 and 499 – Bad credit score.
Whenever you apply for credit, the first thing the lender will do is get your credit score. It will then compare it to these ranges and make a decision as to whether or not to grant you credit as they depend on credit scoring to predict how you will pay your bill.
A new type of credit scores
As we noted above, the tried and true credit score is your FICO score. However, there is a new score called the VantageScore. This score was developed jointly by the three credit bureaus – Experian, Equifax and TransUnion. It is said to help lenders make better decisions and may shake up the credit scoring industry.
It could make consumers happier
There are ways that the VantageScore differs from the FICO score that could make consumers happier. One example is the way that it evaluates collection accounts. Suppose you had a medical bill or nuisance bill that ended up in collection but you paid if off. In the VantageScore model, paid collection accounts will no longer lower your credit score. Of course, unpaid collections will still damage it. But if you have paid off a collection account, it will no longer stay in your credit report for the normal seven and half years.
Another significant difference is that VantageScore 3.0 is said to provide credit scores for more consumers; about 13 million more than prior versions of the model. In fact, VantageScore claims that it should be able to score about 14 million more consumers than its competitors or a total of 27-30 million more people. How does this work? For FICO to score people, it requires at least six months of their credit histories and with at least one account reported in the previous six months. On the other hand, VantageScore requires only a one-month history and only one account reported to the agency within the past two years. What this translates into is that it’s much easier to find people with a one-month history than people whose account history goes back six months. In addition, VantageScore also generates scores for people who:
• Weren’t using credit often but did use it in the past 24 months
• Show no recent activity at all on their credit reports. The last information reported about them may have been 3-4 years ago. These consumers are relatively good quality. More than 70% percent have credit scores of 600 or better. They have had accounts for a long time but don’t use them very often.
• People who have no open accounts. These are often consumers who fall into the “subprime” category such as those who gone through a bankruptcy and consequently stopped using credit, or those whose only listed accounts have negative information.
Who these credit scores will help
VantageScore has said it believes this new scoring model could be particularly good for immigrants, people who stopped using credit during the Great Recession and retirees who are no longer using credit cards are taking out loans.
Not all mortgages are treated equally
The third innovation introduced in the VantageScore is how it gets into details about the ways we’ve handled credit before, during and after the recession. It looks at data over a longer period of time because consumers’ behavior having to do with credit has changed and credit scores have not necessarily captured this. The data becomes more detailed or more granular. As an example of this, in normal scoring models, a real estate loan is a real estate loan. But in VantageScore 3.0, a home equity line of credit is treated differently than a first mortgage. This is due to the fact that the default rate on first mortgage is twice that of HELOCs.
Will you have a higher score?
The bottom line question here is will your VantageScore be higher than your FICO score? That question will be difficult to answer until enough lenders begin using the new VantageScore 3.0, which is likely to occur later this year. If you would like to see the difference between your estimated FICO score and your VantageScore (based on its current model), you could use Credit’s free Credit Report Card.
For more information on why there is a new VantageScore, check out this short video from the VantageScore people.