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Finally: New credit scoring system set

Updated: May 3, 2013 12:14PM



Remember back in high school, when it seemed your whole life would be determined by your SAT score? Well, now there's a new score that will impact your entire life.

On Tuesday, the three largest credit bureaus -- Equifax, Experian and TransUnion -- announced they have created a new credit scoring system, "VantageScore," aimed at simplifying the loan process for both lenders and borrowers.

Credit bureaus are best known for compiling your credit report. The credit report merely reflects the information collected by the bureau from anyone who has granted you credit or who inquires about your credit.

Your credit score uses a proprietary modeling process, designed to weigh factors in your credit report -- such as the amount of debt you have outstanding and your history of prompt payments.

CREDIT MYTHS

Personal finance experts say the biggest factor in a bad credit rating is poor payment history. Consumers who don't pay their bills or pay them late have lower credit ratings.

Beyond that, nothing else affects your credit score, including these four myths:

Myth 1: Checking your own credit will lower your score. Nope. Check all you want through the credit bureaus.

Myth 2: Your age, income and sex are factored into your score. Nope. Credit-industry experts say your place of employment is on a credit report, but even that doesn't affect the score itself.

Myth 3: The higher the salary, the higher the score. No again. And neither will winning the lottery. Pay off your debts. That will improve your score.

Myth 4: Credit scores are averaged when you marry. No. Your score is your score, and follows you like a shadow.

Credit scores have been around for a long time -- used by businesses to codify the information in your credit report and predict your creditworthiness. The best known name in the business has been the FICO score, so labeled because it was created by a pioneering company in the business, Fair Isaac Co.

But a variety of other credit scoring models have been used by both lenders and credit bureaus. The result has been a bewildering range of credit scores that showed wide discrepancies. Depending on which score was used, you might have been turned down for credit -- or required to pay a higher interest rate.

The solution -- jointly created by the credit scoring experts at all three credit bureaus -- is the new VantageScore that will range from 501 to 990. The higher the score, the more creditworthy the individual is deemed to be.

The VantageScore scoring system was created by taking information about a select, large group of consumers from all three credit bureaus at the same time to create a consistent, standardized scoring formula. It uses a new algorithm for modeling the factors that create the score, a process so unusual that the joint venture has applied for a patent on it.

The joint scoring formula will eliminate discrepancies as wide as 30 percent that currently exist in credit scores. But there still will be some disparities because the three major credit bureaus don't receive exactly the same information. Some credit grantors report your payment history to only one or two of the bureaus. Still, using the same scoring system should provide a lot more uniformity to the process.

Now the challenge is to get businesses to actually use this new VantageScore, rather than the other existing scoring models. It's expected that major credit grantors will quickly start evaluating the new score, comparing it to their existing models. If many agree to adopt VantageScore, that will benefit consumers in the long run.

Equifax says it'll wait until lenders accept this new score before marketing it to consumers. That's expected to take at least six months. But the financial institutions have been requesting a consistent, high-quality scoring model to aid them in their credit granting decisions, and they are certain to make this evaluation a priority.

Each bureau will market the VantageScore in its own way and set its own price. Federal law requires each bureau to give you one free credit report a year. (The easiest way to do that is to go to www.annualcreditreport.com and click on the link to each bureau.) So the credit bureaus will use the new VantageScore, along with their credit monitoring services, as a source of revenue.

It's expected that the credit bureaus will bundle their own, or all three, credit reports, along with the new VantageScore, and possibly a subscription to their credit monitoring service for a fee to be determined. But again, that depends on how widely accepted the new VantageScore becomes.

Since so much of our lives are impacted by how we're viewed by credit grantors, we can applaud the three bureaus for their joint effort. It's time consumers knew the real score. And that's The Savage Truth.



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