Anyone who intends to seek loans from now on for credit cards, house mortgages and cars should know that their credit score plays a vital role in determining their interest rates.
Only now the question is: Which credit score?
VantageScore recently announced that during one-year period between July 1, 2014, and June 30, 2015, it generated more than 6 billion credit scores for lenders, about double what it did for the 12-month period before that.
That’s phenomenal growth. The 6 billion approaches FICO’s 10 billion credit scores, said John Ulzheimer, credit expert and author.
“What this means to consumers is that we don’t live in FICO world anymore,” Ulzheimer said.
That, in turn, means consumers applying for credit should know both their VantageScore and FICO credit scores to determine which is best for them. They then can choose lenders based on which credit-score brand they use.
FICO dates back to the 1950s and introduced credit scores in 1989 with one of the three main credit bureaus, Equifax. The FICO score had almost no competition until 2006 when the three main credit bureau agencies — Equifax, TransUnion and Experian — developed a competitor brand called VantageScore.
Credit score providers sell credit scores to lenders. FICO gets a royalty when lenders buy FICO scores. FICO does not get royalties when lenders buy VantageScore credit scores, Ulzheimer explained.
The main purpose of credit scores is to provide lenders a number that tells them the amount of risk involved with each credit applicant.
Both FICO and VantageScore use the same number range for credit scores: 300 to 850. A credit score of 500 and below is considered a high risk, a bad credit score that usually results in higher loan interest rates. A credit score of 780 and higher is consider an elite good credit score, Ulzheimer said. Lenders can vary their determinations of good and bad scores for numbers in between and then offer terms based on those determinations to the applicants.
FICO’s website does list the factors that go into credit scores. The factors are: new credit, length of credit history, credit mix, payment history and amounts owed.
FICO assigns a percentage to each factor, but FICO also explains that credit score calculations “may vary” and “depends on the overall information in your credit report.”
Ulzheimer said FICO and VantageScore both derive their numbers from the same information, the credit reports maintained by the credit bureaus. But the specific numbers from FICO and VantageScore almost always will differ.
“It’s like Coke and Pepsi,” Ulzheimer said. “They both make the same thing, but they don’t share their formulas.
“What we can say for sure is that someone with a good credit report will have a good credit score with either one,” Ulzheimer said.
Consumers have no control over where lenders obtain their credit scores. So if a consumer is applying for a car loan and isn’t happy with the payment terms, he or she cannot ask the lender to check with the other brand.
The best approach, Ulzheimer said, is for consumer to know both credit scores. If there’s a preference, then the consumer should choose a lender who uses that brand. In addition to credit cards, mortgages and car loans, credit scores are important for student, personal, boat and furniture loans.
Credit scores once were difficult for consumers to obtain without paying a fee, but scores are becoming increasingly free.
Ulzheimer said consumers now can receive free credit scores from online sites that include Quizzle.com and Mybankrate.com, both of which are based on Equifax reports. Credit.com provides free credit scores based on TransUnion reports.
Many credit card companies now offer free FICO scores to their card holders on monthly statements or the online versions of their monthly statements, Ulzheimer said.
Being a consumer is becoming more complicated, but the more consumers understand about the behind-the-scenes workings of the credit industry, the better terms they can receive.
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