Tuesday, April 18, 2006

Credit scores: Where confusion abounds

Just when we get used to the idea of credit scores and each credit bureau having its own version, here comes yet another version. But first, let's review:

In the beginning, there was Fair Isaac, the firm that invented a mathematical formula that creates an individual's three-digit FICO score, which supposedly measures how much debt a consumer is carrying and how well the consumer keeps up with bills. The higher the score, the better risk that person represents.

Experian, Equifax and TransUnion are private companies that track individuals' credit accounts and payment habits. Not wanting to be left out of the lucrative credit-scoring business, each created its own brand of credit score, licensed the FICO scoring model to create its individual "brand" and made the scores just different enough to become very confusing. One bureau's scores can go as high as 900, while another tops out at 820. That means a score of 780 could be marvelous with one agency but rather average with another.

Several weeks ago, the credit bureaus announced they are banding together to come up with an all-new, uniform credit score called VantageScore. The reasoning is, this new VantageScore will be easier for consumers to understand and will make things more consistent for lenders. Of course, they refer to the "confusion that abounds" in credit scoring as their motive. I don't buy it for a moment. I see the bureaus creating a new income stream because, without a doubt, this is a new product for which they will charge dearly.

In its announcement, Experian said the new VantageScores will be grouped on "the familiar academic scale."

A - 901-990
B - 801-900
C - 701-800
D - 601-700
F - 501-600

Of course, there will be a hefty charge to get one's VantageScore, and I'll wager it will be more than a onetime event. They will want to sign us up for monthly credit-score monitoring or some such thing.

While I cannot comment further on the VantageScore until I see it, I can advise that unless you are planning to apply for a mortgage or other secured financing within the next couple of months, don't worry about your credit score. You don't need to know what it is. Instead, keep your eye on your credit report - free once a year from each of the big-three credit bureaus. Go to http://www.annualcreditreport.com/ to get your free reports, and make sure only correct information is reflected in them. Then pay your bills on time. All of your bills, all of the time.
On the rare occasion you need to check your credit score (in anticipation of applying for a mortgage would be a good reason to check it), go to http://www.myfico.com/. This is the score that most lenders look to and the one most widely respected.

Take care of your financial affairs in a responsible manner, and your credit score will take care of itself.

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