Credit Card Review Blog

What the New Credit Score Formula Means to You

What the New Credit Score Formula Means to You

Lenders don’t just have one formula to use anymore for judging your past. Now, they have two. Each of the three major credit bureaus backs this new formula. The VantageScore could actually be completely different from your FICO score.

All three of the major credit bureaus are extremely proud of this new credit score scoring system. They say it is more consistent than other methods and is easier to use. Boy, that is a relief because the FICO method is so confusing. But, is VantageScore really all that different or all that much better?

VantageScore uses the same underlying information about you that the FICO score uses. However, VantageScore has proven to pose some new serious risks to the consumer. How big are the risks? Well, let’s just say that VantageScore isn’t exactly helping out the little guy.

Keep in mind that Experian, TransUnion, and Equifax are private companies. These private companies keep track of your accounts, balances and payment histories. So, what exactly is a credit “score?” A credit score assigns a weight to each of the above factors. This score gives lender an easy way to determine how big of a threat you are. FICO scores, or Fair Isaac’s formula is the formula that is used most often.

What you probably don’t realize is that lenders actually pay the Fair Isaac Corporation for use of the FICO scoring system. Twenty percent of the Fair Isaac Corporation’s revenues are from credit scoring. On the other hand, credit scoring accounts for 65 percent of its operating profits. So, all three credit bureaus are paying quite the hefty sum to use the FICO method. Obviously, they want to cut out the middleman.

When the VantageScore method first came out, Fair Isaac’s stock decreased 6.6%. This was before the bureaus even signed up one lender. Credit bureaus are hoping to drive the price of the FICO score method down by using VantageScore as leverage.

The FICO scale ranges from 300-850. VantageScore starts at 501 and goes to 990. People are liking the idea of VantageScore because it breaks down credit like a school report card. This makes it much easier for people to understand. The break down goes like follows:

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

As you can see, this method is easier to understand, especially to the average consumer. They don’t have to wonder where their score of 650 lies on the scale. The credit bureaus are hopeful that the VantageScore method will help reduce any confusion that consumers may have.

VantageScore may be the silver-lining that you’ve been looking for if you are extremely confused about the way credit scores are calculated.