Did you know that the FICO score isn’t the only credit score available? Because it has been around for so long, its name is almost synonymous with the words “credit score”. Credit score, FICO score – same thing, right?
Not at all. The FICO score is a scoring model from Fair Issac. FICO’s competitor, VantageScore, is a credit scoring model most people haven’t even heard of.
If you’re in the market for an auto loan, you should know what the VantageScore is because there are auto lenders who look at your VantageScore and use it to determine whether or not they will give you a car loan.
What is VantageScore?
VantageScore was formed at the beginning of 2006 using a database with two years worth of information, says Barrett Burns, president and CEO of VantageScore Solutions, LLC. It was developed by Experian, Equifax and Transunion, the three major credit reporting companies. VantageScore's range is from 501 to 990. The higher the score, the less risk a consumer poses to a lender.
“It was developed from the ground up,” Burns explains. “It's not a remake of another version. We used the years 2003 to 2005 for our information. During those two years, there was significant volatility. Consumer debt rose and subprime lending increased.”
“We developed VantageScore to be more predictive and to increase consistency, especially for mortgages. Other models were developed at different points in time. This is why they are inconsistent.”
Burns says that the VantageScore is important to the auto finance industry because it helps more people obtain credit.
“We score millions more people in auto finance,” Burns says. “We give more consumers access to credit.”
“We recognize people who use credit differently and infrequently. VantageScore is good for people who have a hard time getting scored and who use credit in nontraditional ways.”
For example, a consumer may be really prudent with credit and primarily use cash, he explains. If they have no credit activity in six months, some scores will drop them and they won't have a credit score. Also, some credit scores won't score consumers in the first six months they start to use credit. VantageScore scores immediately after a consumer starts using credit.
Burns says that some of these people who use credit differently may be considered subprime, even though they may pay their bills on time.
“I'm a believer in subprime credit,” Burns says. “Subprime is helpful as long as it doesn't morph into predatory lending.”
VantageScore and Car Shopping
Consumers repeatedly hear that they should check their credit score before they go to the dealer and apply for an auto loan. Should they check to see what their VantageScore is before they head to the dealer?
“This depends on what bank the dealer uses and if that bank uses VantageScore,” Burns says. “Seven of the top 50 auto lenders use VantageScore.”
What this means is that when you apply for the car loan, the lender may be using your VantageScore, not your FICO score, to determine whether or not they will approve you for the loan. If you don't know what your VantageScore is, you may be at a disadvantage when it comes time to negotiate your financing.
Consumers can get their VantageScore from Experian and Transunion's Web sites, Burns explains. There are also educational tools there to help consumers before they apply for credit.
“A knowledgeable consumer should walk into the dealer saying, 'My score is x. What do you show?’” Burns says. “Also, by asking if the dealer uses the VantageScore system, this will make the consumer come across more educated. Just by asking these questions, it sends a message to the F&I guy.”
By asking the dealer's finance manager if they use the VantageScore, be aware that they may not know, Burns says. It depends on what the lender reveals to them because there are lots of scores.
VantageScore and Auto-Loan-Specific Credit Scores
VantageScore, like FICO score, is different from an auto-loan-specific credit score. An auto-loan-specific credit score looks more closely at how a consumer has paid their car loan in the past.
Burns, who has more than three decades of lending experience at companies including U.S. Trust, Ford Motor Credit, Bank One and Citibank, says that a misconception about the auto-loan-specific credit score is that all dealers have it available.
“Custom scores, like an auto-loan-specific score, are only used by huge auto lenders,” Burns (pictured right) explains. “The global analytics department at Ford developed algorithms for specific scores. This was possible because they had an enormous database of information. Only a handful of lenders can afford to do that. Most use a generic score, like FICO or VantageScore, when looking at auto loan applications.”
What is Considered a Good VantageScore?
In terms of auto lending, a good VantageScore is hard to define, says Burns.
“The lender sets the cut-off,” he explains. “If they are just prime, the cut-off is high. Subprime is different. It comes down to the lender's criteria and how much risk they want to buy from the dealer.”
“What is prime changes all the time. A good lender will look at vehicle models to diversify their portfolio. It depends on the lender's appetite. They may be 'choking on' (have a lot of) xyz models, so they will relax their standards on those models. The criteria can also change if a model is no longer made.”
Burns says that with auto lending, there are so many things that happen that the consumer never really knows about during the entire auto loan process.
“There's all kinds of things going on behind the scenes to 'move the metal and get it out of the yard' (sell more cars),” Burns says. “When inventory piles up, dealers say that 'the metal is against the fence'.”
How Can Consumers Improve Their VantageScore?
To improve a VantageScore, the simple answer is to pay your bills on time, Burns says.
“Consumers should think twice about canceling old credit cards,” he says. “This will erase the history of the account. Also, don't consolidate your credit cards into one. This chews up your unused lines. Lenders like to know you have available credit for emergencies.”
“Don't zap your unused lines of credit. Be careful with things like that. If you're afraid of overusing your credit cards, just cut them up and keep the accounts active.”
Why Most Consumers Have Never Heard of VantageScore
If you're one of the many consumers who have never heard of VantageScore, you may hear about it more in the near future. Why are there no advertisements and marketing to consumers about VantageScore right now?
“We license the algorithm to the three bureaus and they market it to consumers,” Burns says. “We don't (market it). They have to get it embedded into the lenders first, which is a very long sales cycle. After that, they will market it more to consumers. Experian is putting more press releases out about VantageScore. The marketplace is big enough for a lot of providers.”
Although FICO scores and VantageScores are different, consumers should probably pull both to see where they're at and realize that different lenders use different credit scores. Remember, the more you educate yourself and research all your financing options before you head to the dealer, you'll walk out with the best auto loan rate you can get.
Friday, June 24, 2011
Thursday, June 23, 2011
Get Your Credit Score To Soar In The Twinkling of An Eye
Ever wonder how a creditor decides whether to grant you credit? For years, creditors have been using credit scoring systems to determine if you'd be a good risk for credit cards and auto loans. More recently, credit scoring has been used to help creditors evaluate your ability to repay home mortgage loans. Here's how credit scoring works in helping decide who gets credit -- and why.
What is credit scoring? Credit scoring is a system creditors use to help determine whether to give you credit.
Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
* Equifax: (800) 685-1111
* Experian (formerly TRW): (888) EXPERIAN (397-3742)
* Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
Why is credit scoring used? Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
How is a credit scoring model developed? To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like -- race, sex, marital status, national origin, or religion -- as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.
What can I do to improve my score? Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change -- but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
* Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
* What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
* How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
* Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
* How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.
How reliable is the credit scoring system? Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor.
Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.
Tip! Thoroughly review your credit score for errors or outdated information. Quite often, certain lending institutions are not due diligent on updating old information.
What happens if you are denied credit or don't get the terms you want? If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system."
If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time.
Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your report, but only the creditor can tell you why your application was denied.
If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information in your credit report.
What is credit scoring? Credit scoring is a system creditors use to help determine whether to give you credit.
Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:
* Equifax: (800) 685-1111
* Experian (formerly TRW): (888) EXPERIAN (397-3742)
* Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
Why is credit scoring used? Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
How is a credit scoring model developed? To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like -- race, sex, marital status, national origin, or religion -- as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.
What can I do to improve my score? Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change -- but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
* Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
* What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
* How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
* Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
* How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.
How reliable is the credit scoring system? Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor.
Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.
Tip! Thoroughly review your credit score for errors or outdated information. Quite often, certain lending institutions are not due diligent on updating old information.
What happens if you are denied credit or don't get the terms you want? If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system."
If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time.
Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your report, but only the creditor can tell you why your application was denied.
If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information in your credit report.
Wednesday, June 22, 2011
Why None of Your Credit Scores are the Same
Many people are rather surprised when they look at their credit scores and see that they don’t match up. A credit score may differ across different credit bureaus, and those scores are often a little bit different than what you see when you get your score from FICO. Sometimes the difference is more than a “little.” In some cases, your might find that your credit scores vary by up to 20 points — or more. Why is this? The answer lies in the fact that credit scoring models differ across agencies and financial institutions.
Two Credit Scoring Models: FICO and VantageScore
Most of us think of FICO when we think of credit scores. Fair Isaac Company pioneered credit scoring as we know it today, coming up with a complex formula to predict borrower behavior based on how credit users have behaved in the past. In order to come up with the FICO score, Fair Isaac Company uses information found in your credit report. But FICO is more than just one score. Indeed, Fair Isaac has a number of different scores that it markets to financial services providers to use when evaluating you. There is a depositor score that rates your banking behaviors, as well as mortgage score that lenders can use to determine your default risk.
VantageScore is another credit score model, this one created by the three major credit agencies. Unlike the FICO score, which ranges from 300 – 850, the VantageScore ranges from 501-990. Additionally, the VantageScore also includes letter rating of A to F. According to the VantageScore web site, this credit scoring model is designed to be a little more friendly toward those who use credit irregularly. The credit agencies claim that the VantageScore, which also gets the data for its scores from credit reports, can help provide an accurate look at those who may be penalized by the FICO score for not using credit as frequently.
Tweaking Credit Scores
One of the reasons that each agency comes up with a different score for you is that not all agencies have the same information reported to them. But, on top of that, each agency tweaks the FICO score as well (except Experian, which does not use the FICO score). But credit agencies aren’t alone in tweaking the formula. Many lenders and insurers have their own ways of emphasizing certain factors more or less in their own scoring models, as well as considering other information.
The result of this is that your credit score can vary widely, depending on what information the institution figuring your score has, and what information is emphasized more in their only variations of credit scoring formulas they use.
More Consumer Information Being Used to Build a Profile
Anymore, lenders and other financial services providers are relying on more than a simple score model. Credit score systems are becoming increasing complex, and some creditors are also striking out on their own to do additional research. The Fed has decided that lenders can use “income estimates” figured by credit bureaus to verify your income, and some lenders actually check what you say about money on your social media profile. On top of that, it is possible for creditors to pinpoint exact purchases made with debit and credit cards.
All of this information has the possibility of being used to construct consumer profiles that can then be used by financial services providers. It is even possible that ever-evolving credit scoring models will begin to take some of this data into consideration.
Two Credit Scoring Models: FICO and VantageScore
Most of us think of FICO when we think of credit scores. Fair Isaac Company pioneered credit scoring as we know it today, coming up with a complex formula to predict borrower behavior based on how credit users have behaved in the past. In order to come up with the FICO score, Fair Isaac Company uses information found in your credit report. But FICO is more than just one score. Indeed, Fair Isaac has a number of different scores that it markets to financial services providers to use when evaluating you. There is a depositor score that rates your banking behaviors, as well as mortgage score that lenders can use to determine your default risk.
VantageScore is another credit score model, this one created by the three major credit agencies. Unlike the FICO score, which ranges from 300 – 850, the VantageScore ranges from 501-990. Additionally, the VantageScore also includes letter rating of A to F. According to the VantageScore web site, this credit scoring model is designed to be a little more friendly toward those who use credit irregularly. The credit agencies claim that the VantageScore, which also gets the data for its scores from credit reports, can help provide an accurate look at those who may be penalized by the FICO score for not using credit as frequently.
Tweaking Credit Scores
One of the reasons that each agency comes up with a different score for you is that not all agencies have the same information reported to them. But, on top of that, each agency tweaks the FICO score as well (except Experian, which does not use the FICO score). But credit agencies aren’t alone in tweaking the formula. Many lenders and insurers have their own ways of emphasizing certain factors more or less in their own scoring models, as well as considering other information.
The result of this is that your credit score can vary widely, depending on what information the institution figuring your score has, and what information is emphasized more in their only variations of credit scoring formulas they use.
More Consumer Information Being Used to Build a Profile
Anymore, lenders and other financial services providers are relying on more than a simple score model. Credit score systems are becoming increasing complex, and some creditors are also striking out on their own to do additional research. The Fed has decided that lenders can use “income estimates” figured by credit bureaus to verify your income, and some lenders actually check what you say about money on your social media profile. On top of that, it is possible for creditors to pinpoint exact purchases made with debit and credit cards.
All of this information has the possibility of being used to construct consumer profiles that can then be used by financial services providers. It is even possible that ever-evolving credit scoring models will begin to take some of this data into consideration.
Tuesday, June 21, 2011
What Makes up Your Credit History?
Your credit history starts as soon as you get your first credit card. It is a collection of all the credit accounts that you have ever opened and how you have dealt with repayment and borrowing. This history contains information about payments that weren’t on time, or any other issues you have had with repayment, including defaults or bankruptcy. This history is mainly based off of credit cards, mortgage, and car loans.
But, alternative credit scoring models can also use information from rent payments, cell phone bills, and possibly even utility bills. It is believed that these factors aren’t incorporated heavily into FICO’s scoring model, but may be used more in the future. Certain alternative credit scoring companies gather some of this information and provide it to FICO, but it is not known exactly how they use this data.
What if you have a Bad History?
Currently in the FICO credit scoring model, payment history makes up around 30% of your total credit score. If you have made late payments or defaulted in the past, you still have the opportunity to turn your score around. Your credit score number moves and adjusts when new information comes in, so if you change your spending habits in a positive way, your new credit score will reflect that.
You can actively increase your score in a few different ways. One way is to pay down any outstanding credit balances that you might have. Your credit to debt ratio is a factor that is heavily weighted in your overall score. A “credit to debt ratio” is the amount of debt you have compared to the amount of credit that is available to you. Many professionals suggest that consumers keep a “credit to debt ratio” to around 30%. In simpler terms, this means that if you had $10,000 worth of credit available to you, you should only have spent $3000 (or 30%).
Another way that you can boost your score is to get your credit report and look for errors. It has been reported that there are errors on up to 70% of credit reports. This often can happen when a debt is paid off, but the creditor forgets to remove the item. This inaccurate data can be removed by by filing a dispute letter with the credit bureau that made the error. Once you file a dispute letter a credit bureau has 30 days to check with the creditor.
Your credit is a lengthy history that shows how you handle money. If you have made some mistakes in the past and your credit score isn’t where you want it to be, it can always be fixed with some work and a little bit of time.
But, alternative credit scoring models can also use information from rent payments, cell phone bills, and possibly even utility bills. It is believed that these factors aren’t incorporated heavily into FICO’s scoring model, but may be used more in the future. Certain alternative credit scoring companies gather some of this information and provide it to FICO, but it is not known exactly how they use this data.
What if you have a Bad History?
Currently in the FICO credit scoring model, payment history makes up around 30% of your total credit score. If you have made late payments or defaulted in the past, you still have the opportunity to turn your score around. Your credit score number moves and adjusts when new information comes in, so if you change your spending habits in a positive way, your new credit score will reflect that.
You can actively increase your score in a few different ways. One way is to pay down any outstanding credit balances that you might have. Your credit to debt ratio is a factor that is heavily weighted in your overall score. A “credit to debt ratio” is the amount of debt you have compared to the amount of credit that is available to you. Many professionals suggest that consumers keep a “credit to debt ratio” to around 30%. In simpler terms, this means that if you had $10,000 worth of credit available to you, you should only have spent $3000 (or 30%).
Another way that you can boost your score is to get your credit report and look for errors. It has been reported that there are errors on up to 70% of credit reports. This often can happen when a debt is paid off, but the creditor forgets to remove the item. This inaccurate data can be removed by by filing a dispute letter with the credit bureau that made the error. Once you file a dispute letter a credit bureau has 30 days to check with the creditor.
Your credit is a lengthy history that shows how you handle money. If you have made some mistakes in the past and your credit score isn’t where you want it to be, it can always be fixed with some work and a little bit of time.
Monday, June 20, 2011
What's a Credit Score?
A credit score is a number that attempts to predict your “credit-worthiness” at any given moment. Officially, it’s supposed to predict how likely you are to become at least 90 days late on payments within the next twenty-four months. Credit scores are calculated using complex, secret formulas that are only known by the companies that produce them (although these companies have given us some general guidance on how they calculate credit scores.)
A company called Fair Isaac Corporation pioneered the use of credit scores in 1956, but they didn’t become widely used by creditors until the 1980’s. Then, in 1995, Fannie Mae and Freddie Mac recommended the use of credit scores in mortgage lending. From then on, credit scores became perhaps the single-most important tool for creditors when offering loans to consumers.
Now, credit scores are even used by insurance companies and other service providers in determining whether, and on what terms, they will offer their services to you. (Personally, we have real problems with the use of credit scores in the granting of insurance and other services. We have difficulty believing that someone doesn’t deserve home or car insurance because they got sick and fell behind on their bills. Unfortunately, we don’t get to set the rules. So, we just have to do everything we can to improve your credit scores so that you don’t have problems with anyone - creditors or service providers!)
There are now many different types of credit scores, developed by different companies, for use in different industries. For example, there are credit scores that are used solely for automotive lenders, credit card issuers, or finance companies. (Some commentators have suggested that, between the different credit scoring companies, there are more than 1000 different credit scoring models currently in use.) But, the most widely used credit score, by far, is the score developed by the Fair Isaac Company, the pioneer of credit scores.
The credit score developed by Fair Isaac is known as a “FICO” score (from the “Fair Isaac Corporation”). To determine a FICO score for a consumer, Fair Isaac developed a formula based on nearly forty different “characteristics” that it claims predict the likelihood that the consumer will repay their debts.
Fair Isaac also groups different classes of consumers according to key “attributes” and then compares a given consumer’s credit file to other consumers in that same group. For example, there may be a group of consumers who have filed for bankruptcy. There may be another group of consumers who have one late payment, and so on. Fair Isaac believes that separating consumers into groups of consumers with common key attributes makes the credit score even more predictive of credit worthiness. This system is called a “scorecard” system.
But guess what? There’s more than one credit scoring model. Sure, there are other companies that have their own credit scoring system (we’ll talk about that in a minute). But, even Fair Isaac has more than one credit scoring model. In fact, they have many different credit scoring models.
The most commonly used model is known as the “Classic” FICO scoring model. This model uses 10 “scorecards” or groups of people with similar key attributes. But, Fair Isaac has also developed another scoring model called “Next Generation” or “NextGen” that uses 18 scorecards or groups. Fair Isaac believes that the NextGen scoring model is even more advanced and predictive than the Classic model. In addition, Fair Isaac has developed enhancements to the Classic model.
So, why should you care about this? Well, it’s a problem for us every day, because different creditors use different credit scoring models. Some may use the Classic FICO. Others may use the enhanced versions of the Classic FICO. Still others may use the NextGen FICO. And the result? Yes, that’s right, different scores.
We may pull a credit score for a potential borrower, and get one score. But, if a lender uses a different credit reporting company for their credit report, it’s very possible that the credit score will be different. So, while the borrower would qualify for a certain loan based on our credit report and score, the borrower may NOT qualify using the lender’s credit report. This can be a real problem for loans that are teetering on the edge anyway. (Some lenders, recognizing this problem, are allowing mortgage brokers to use the credit report and score from “their” credit provider, and will qualify the borrower based on that credit report.)
A company called Fair Isaac Corporation pioneered the use of credit scores in 1956, but they didn’t become widely used by creditors until the 1980’s. Then, in 1995, Fannie Mae and Freddie Mac recommended the use of credit scores in mortgage lending. From then on, credit scores became perhaps the single-most important tool for creditors when offering loans to consumers.
Now, credit scores are even used by insurance companies and other service providers in determining whether, and on what terms, they will offer their services to you. (Personally, we have real problems with the use of credit scores in the granting of insurance and other services. We have difficulty believing that someone doesn’t deserve home or car insurance because they got sick and fell behind on their bills. Unfortunately, we don’t get to set the rules. So, we just have to do everything we can to improve your credit scores so that you don’t have problems with anyone - creditors or service providers!)
There are now many different types of credit scores, developed by different companies, for use in different industries. For example, there are credit scores that are used solely for automotive lenders, credit card issuers, or finance companies. (Some commentators have suggested that, between the different credit scoring companies, there are more than 1000 different credit scoring models currently in use.) But, the most widely used credit score, by far, is the score developed by the Fair Isaac Company, the pioneer of credit scores.
The credit score developed by Fair Isaac is known as a “FICO” score (from the “Fair Isaac Corporation”). To determine a FICO score for a consumer, Fair Isaac developed a formula based on nearly forty different “characteristics” that it claims predict the likelihood that the consumer will repay their debts.
Fair Isaac also groups different classes of consumers according to key “attributes” and then compares a given consumer’s credit file to other consumers in that same group. For example, there may be a group of consumers who have filed for bankruptcy. There may be another group of consumers who have one late payment, and so on. Fair Isaac believes that separating consumers into groups of consumers with common key attributes makes the credit score even more predictive of credit worthiness. This system is called a “scorecard” system.
But guess what? There’s more than one credit scoring model. Sure, there are other companies that have their own credit scoring system (we’ll talk about that in a minute). But, even Fair Isaac has more than one credit scoring model. In fact, they have many different credit scoring models.
The most commonly used model is known as the “Classic” FICO scoring model. This model uses 10 “scorecards” or groups of people with similar key attributes. But, Fair Isaac has also developed another scoring model called “Next Generation” or “NextGen” that uses 18 scorecards or groups. Fair Isaac believes that the NextGen scoring model is even more advanced and predictive than the Classic model. In addition, Fair Isaac has developed enhancements to the Classic model.
So, why should you care about this? Well, it’s a problem for us every day, because different creditors use different credit scoring models. Some may use the Classic FICO. Others may use the enhanced versions of the Classic FICO. Still others may use the NextGen FICO. And the result? Yes, that’s right, different scores.
We may pull a credit score for a potential borrower, and get one score. But, if a lender uses a different credit reporting company for their credit report, it’s very possible that the credit score will be different. So, while the borrower would qualify for a certain loan based on our credit report and score, the borrower may NOT qualify using the lender’s credit report. This can be a real problem for loans that are teetering on the edge anyway. (Some lenders, recognizing this problem, are allowing mortgage brokers to use the credit report and score from “their” credit provider, and will qualify the borrower based on that credit report.)
Sunday, June 19, 2011
Credit Scores – Most Predictive Credit Scoring Model Launched
Newest version of score enables lenders to improve risk prediction in changing market
Experian®, the global information services company, today announced the availability of VantageScore® 2.0 from Experian, the newest and most predictive version of the credit scoring model.
Built on the proven performance of VantageScore 1.0, VantageScore 2.0 was developed due to the extraordinary changes in economic and credit conditions and the ways consumer payment behaviors have markedly changed over the past several years. Testing has shown that the new model improves risk prediction, and scores more people and provides more consistent consumer scores across all three credit reporting companies over VantageScore 1.0.
Experian advances new model and first lender adopts
According to JP Morgan’s Global Equity Research, October 2010, “VantageScore is gaining traction. Chase recently adopted VantageScore becoming one of the first major lenders to replace certain usage of FICO scores with the new model and view it as an important sign of the bureaus’ growing prowess in analytics, modeling and decisioning.”
VantageScore 2.0 from Experian enables lenders in production environments to increase their populations of target customers while managing appropriate risk. This is done through the new credit model’s development sample, which is compiled from two performance time frames: 2006–2008 and 2007–2009. Each time frame contributes 50 percent of the sample, reflecting more recent credit conditions. This approach reduces the model’s sensitivity to volatile behavior in a single time frame and helps create a highly predictive score that enables lenders to mitigate risks and make more informed lending decisions.
“Given the dramatic shifts in today’s credit environment, lenders need information and tools that reflect these changes to make sound lending decisions,” said Kerry Williams, group president of Experian Credit Services and Decision Analytics. “VantageScore 2.0 delivers an even greater performance lift to provide a higher level of confidence in risk decisions when including the score in the underwriting and lending process.”
New features
VantageScore 2.0 includes authorized user trades when calculating the score and employs an optional set of reason code explanations that are more customer-friendly. Also packaged with VantageScore 2.0 are the same innovative performance definitions, level characteristics and advanced segmentation techniques included in VantageScore 1.0 which all contribute to the model’s strength.
Lenders can begin using VantageScore 2.0 immediately.
Experian®, the global information services company, today announced the availability of VantageScore® 2.0 from Experian, the newest and most predictive version of the credit scoring model.
Built on the proven performance of VantageScore 1.0, VantageScore 2.0 was developed due to the extraordinary changes in economic and credit conditions and the ways consumer payment behaviors have markedly changed over the past several years. Testing has shown that the new model improves risk prediction, and scores more people and provides more consistent consumer scores across all three credit reporting companies over VantageScore 1.0.
Experian advances new model and first lender adopts
According to JP Morgan’s Global Equity Research, October 2010, “VantageScore is gaining traction. Chase recently adopted VantageScore becoming one of the first major lenders to replace certain usage of FICO scores with the new model and view it as an important sign of the bureaus’ growing prowess in analytics, modeling and decisioning.”
VantageScore 2.0 from Experian enables lenders in production environments to increase their populations of target customers while managing appropriate risk. This is done through the new credit model’s development sample, which is compiled from two performance time frames: 2006–2008 and 2007–2009. Each time frame contributes 50 percent of the sample, reflecting more recent credit conditions. This approach reduces the model’s sensitivity to volatile behavior in a single time frame and helps create a highly predictive score that enables lenders to mitigate risks and make more informed lending decisions.
“Given the dramatic shifts in today’s credit environment, lenders need information and tools that reflect these changes to make sound lending decisions,” said Kerry Williams, group president of Experian Credit Services and Decision Analytics. “VantageScore 2.0 delivers an even greater performance lift to provide a higher level of confidence in risk decisions when including the score in the underwriting and lending process.”
New features
VantageScore 2.0 includes authorized user trades when calculating the score and employs an optional set of reason code explanations that are more customer-friendly. Also packaged with VantageScore 2.0 are the same innovative performance definitions, level characteristics and advanced segmentation techniques included in VantageScore 1.0 which all contribute to the model’s strength.
Lenders can begin using VantageScore 2.0 immediately.
Saturday, June 18, 2011
Why Do I Have 3 Different FICO Credit Scores At The 3 Credit Bureaus?
Generally speaking, credit scores are regarded as the overall FICO score which is required as an eligibility criterion for something. However, credit consumers do not grasp the concept of how FICO score derivation.
Plus, there are three uniquely different companies(Equifax, Experian and Transunion) that maintain your credit reports. Therefore, these organizations may or may not have a light difference in your FICO score. Sometimes, the difference is minor, and sometimes it is absolutely beyond a common man's comprehension level.
Experian always uses the "Experian or Honest Isaac Model" to calculate scoresfor credit rating. Meanwhile, Equifax's credit scoring model is known as "The Beacon", and Transunion calls its credit score model, "Empirica". The names suggest that every organization has its own way of maintaining a consumer's FICO score.
Other factors that affect or cause a difference in credit reports are;
* Multiple identities;
* If a credit consumer signs up for loans and credits under different identities, his/her report will vary. The three credit score institutes will have different versions of scores because of the unlawful activities of the said consumer. Once caught, the consumer is exposed to a strenuous legal activity that involves lawsuits, heavy fines, imprisonment and forced bankruptcy. Time factor;
* The free or paid FICO credit score reports are a result of the information that is submitted by lenders, inquirers, utility corporations, collection agencies and courts. Hence, it takes 14 to 30 days for the most recent credit card or any other loan based activity to show up in FICO offices. Seeing to this fact, don't get carried away with the shopping hype. Ultimately, when the due payments will show up, you'll be sweating like a prom queen in boys' locker room. Misrepresentation on Behalf of the Financial Institute;
This is where you're encouraged to go for 3 free credit scores through a reliable online source. It is to ensure that your credit activities are going in accordance to your consent and knowledge. Sometimes, despite of having all the high-tech gadgetries, credit companies make accidents. These "accidents" show up as an extremely low or highscore. Once you've notified the FICO officials, they'll fix the error immediately.
Your lender may hinder the loan approval process without any major reasons. Sometimes, they intentionally want to pend the approval process to ward off defaulters. Such types of companies don't come up with a straight "NO" because of the bad rep factor. It would be a good idea to get your free MyFICO credit score today to check the difference between each report.
Plus, there are three uniquely different companies(Equifax, Experian and Transunion) that maintain your credit reports. Therefore, these organizations may or may not have a light difference in your FICO score. Sometimes, the difference is minor, and sometimes it is absolutely beyond a common man's comprehension level.
Experian always uses the "Experian or Honest Isaac Model" to calculate scoresfor credit rating. Meanwhile, Equifax's credit scoring model is known as "The Beacon", and Transunion calls its credit score model, "Empirica". The names suggest that every organization has its own way of maintaining a consumer's FICO score.
Other factors that affect or cause a difference in credit reports are;
* Multiple identities;
* If a credit consumer signs up for loans and credits under different identities, his/her report will vary. The three credit score institutes will have different versions of scores because of the unlawful activities of the said consumer. Once caught, the consumer is exposed to a strenuous legal activity that involves lawsuits, heavy fines, imprisonment and forced bankruptcy. Time factor;
* The free or paid FICO credit score reports are a result of the information that is submitted by lenders, inquirers, utility corporations, collection agencies and courts. Hence, it takes 14 to 30 days for the most recent credit card or any other loan based activity to show up in FICO offices. Seeing to this fact, don't get carried away with the shopping hype. Ultimately, when the due payments will show up, you'll be sweating like a prom queen in boys' locker room. Misrepresentation on Behalf of the Financial Institute;
This is where you're encouraged to go for 3 free credit scores through a reliable online source. It is to ensure that your credit activities are going in accordance to your consent and knowledge. Sometimes, despite of having all the high-tech gadgetries, credit companies make accidents. These "accidents" show up as an extremely low or highscore. Once you've notified the FICO officials, they'll fix the error immediately.
Your lender may hinder the loan approval process without any major reasons. Sometimes, they intentionally want to pend the approval process to ward off defaulters. Such types of companies don't come up with a straight "NO" because of the bad rep factor. It would be a good idea to get your free MyFICO credit score today to check the difference between each report.
Subscribe to:
Comments (Atom)