New Credit Scoring System
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During the month of March, the three major credit bureaus, Experian, Equifax,
and TransUnion announced the creation of a new credit scoring system:
“VantageScore.” This new system is “designed to make it easier for financial
institutions to evaluate loan applications and to give FACSs a better way of
measuring their financial health.” The new scores are supposed to be available
to FACSs later this year after the rollout to lenders.
The argument for
this new system is that FACSs need a more consistent scoring model that works
across all three of the reporting agencies’ data, VantageScore is designed to do
just that. In the past, agencies used their own formulas to generate their own
credit scores, meaning that a lender dealing with a FACS’s application for a
credit card or a mortgage might have to reconcile three widely different scores
by each credit reporting agency. With this new system, a single methodology
will be used to create the scores for all three credit bureaus.
VantageScore ratings will range from 501 to 990 and will be grouped in an
‘academic scale’ – where A and B ratings represent the best potential borrowers
and D and F the weakest:
A - (901-990)
B – (801-900)
D – (601-700)
F – (501-600)
This new score is expected to reduce the variance in a FACS’s score by about
30% compared with the old system. The score will reflect a FACS’s frequency of
borrowing, delinquency of paying bills, and other “file content,” although they
say it is too soon to provide what the specific weights of the score entail.
It’s likely to be based in large part upon similar components of the FICO model
is being independently marketed and sold separately through each of the three
national credit reporting agencies – it is, however, jointly owned by the
three. To learn more, visit: http://www.vantagescore.com.
Source: University of Missouri-Columbia Office for Financial Success –
Financial Tip of the Week, March 17, 2006