No Credit Except for the Hype
Thursday, March 30, 2006
We, as consumers, have always had three different credit scores to present to people who may lend us money or a line of credit. That's because there are three consumer credit rating agencies.
Those three agencies have recently unveiled a new unified scoring system designed to bring consistency to the process of borrowing and lending.
This is supposed to be a good thing and they keep telling us it is, but they won't tell us why. Unfortunately, the bureaus won't disclose how the new system calculates scores so we're stuck with only their hype.
Your credit score is a number designed to give banks an idea of how risky it is to lend you money. The score is based on your credit history: whether you've made a lot of late payments or routinely max out your credit cards. Or, on the positive side, maybe you've never missed a payment and only use credit cards for things you could pay for in cash.
Sponsored By |
The new VantageScore will compete with the long-revered FICO score by Fair Isaac Corp., though, again, we have no idea how the scores compare because the bureaus won't release their algorithm. VantageScore pairs score ranges from 501 to 990 and the familiar academic scale of A to F, presumably to make things really simple for consumers.
-- 901-990 equals an A
-- 801-900 equals a B
-- 701-800 equals a C
-- 601-700 equals a D
-- 501-600 equals an F
So when you're kid comes home and says, 'I've got an A' in home economics you can say, 'Me Too' -- hopefully.
Maxine Sweet, vice president of public education for Experian, said in a press release that credit scoring is the hottest topic among consumers seeking credit education materials. A unified scoring system means consumers can get a clear picture of their credit worthiness instead of having three different scores.
There's a big but here: the main reason one person can have three completely different scores under FICO is because not all creditors report payment history and account information to every bureau. So while Experian might know that you're 60 days late on a car payment, TransUnion may not.
VantageScore does nothing to improve this problem and it doesn't appear that the credit bureaus are focused on the issue of data inaccuracy. So you could still have three different credit scores. Where's the advantage?
The scorers say that consumers can rest assured that the three companies have judged their credit differently not because of the fact that they are different companies that use different scoring formulas but because they receive different information about the person involved. According to a joint press release from the bureaus, scoring differences can no longer be blamed on them but will be attributed exclusively to these data differences.
What they actually said was: "The new scoring system addresses the potential weaknesses in existing scoring solutions in the marketplace because any variances in credit scores between credit reporting companies will be attributed to data differences within each of the three consumer credit files and not to the structure of the scoring model or interpretation of the data."
Isn't that what I just said in English?
If they really wanted to do consumers a service, why not spend some time and resources to ensure that the information they receive about someone is accurate?
Not going to happen. Steven Katz, director for consumer communications at TransUnion, told me consumers must review their credit files and contact creditors regarding inaccuracies. And he said it wasn't a problem: He pointed to a 2004 study by the Federal Reserve Board that found inaccuracies in a credit file don't necessarily affect an individual's ability to obtain credit.
But with predatory lenders willing to offer credit to just about anyone these days, the question isn't so much about whether credit will be granted, but at what rate. That's why it's important for the score to be reflective of accurate information. If you have three different scores, mortgage lenders, for example, generally go with the middle one.
The new scoring system may be the best thing to ever happen to credit scores, but without information we're left with hype. What we do know is that the bureaus got together, agreed on a common system and gave it a marketable name. VantageScore certainly sounds like something that might give you an advantage.
The score is a pretty big deal because the higher it is, the less you pay for the privilege of accessing lines of credit regardless of whether you're buying a home or a cell phone. For example, a person with a credit score between 760 and 850 -- the highest under the FICO system -- will pay $319 less per month for a $216,000 30-year-fixed rate mortgage than a person with FICO scores below 620. That's nearly $4,000 a year just because you never pay your bills late. Fair Issac Corp.'s calculations were based on the best interest rates available at press time.
And it doesn't matter how much money you make or what kind of job you have. Just pay your bills on time and your score will rise. There are a few other factors, but payment history counts for 35 percent under FICO. How much debt you have counts for 30 percent, length of credit history counts for 15 percent of your score. New credit such as the number of recently opened accounts and credit inquiries account for 10 percent of the score. The type of credit accounts for another 10 percent.
Regardless of the system, there are some surefire ways to raise your score:
-- Keep balances low on credit cards
-- Pay off debt rather than moving it around
-- Don't close unused credit cards as a short-term strategy to raise your score it may raise your debt-to-income ratio
-- Don't open a number of new credit cards that you don't need just to increase score - this approach could backfire
-- Don't open a lot of new accounts in a short time
-- Closing an account won't make it go away.
-- Go rate shopping for a loan within a set period of time. FICO scores consider multiple inquiries for a car loan, for example, as a single entry as long as they're within a certain time period.
-- Checking your own credit won't affect your score so check your credit report at least once a year and correct errors.
-- Pay your bills on time, always (this can't be overemphasized so if you're forgetful, set up automatic bill payments or make a date with yourself to pay bills online. It only takes a few minutes and will save you lots of money.
No comments:
Post a Comment