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Sunday, July 23, 2017

FICO Scores Out? VantageScore In?

On March 14th of 2006, there was a press release entitled “Consumer Credit Reporting Companies Introduce VantageScore – New Credit Scoring System to Benefit Consumers and Credit Grantors.” Like most curious mortgage brokers, I dialed my credit reporting company to find out what the low-down was on such an intriguing new concept. Surely this new method of credit scoring would impact my business and the interest rates on my clients’ mortgages, right? Well, as the Hertz rental car people like to say, “not exactly.”
 
First, let’s talk about how this new VantageScore is different from the tried and true FICO score model. The FICO score is a credit score that was developed by Fair Isaac & Company in the 1950s. Most lenders today use the FICO score as a method of determining the likelihood that credit users will pay their bills. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance.
 
Developing these models involves studying how millions of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Credit scores analyze a borrower’s credit history considering numerous factors such as: late payments, length of time credit has been established, the amount of credit used versus the amount of credit available, length of time at present residence, employment history, and negative credit information such as bankruptcies, charge-offs, collections, etc.
 
There are really three FICO scores computed by data provided by each of the three bureaus––Experian, Trans Union and Equifax, and this is where it gets messy. Since a borrower usually has varying credit data with the three bureaus, they  will almost always have three different scores. As a result of this lack of accuracy, lenders will often use the middle score as the representative score for the borrower.
 
VantageScore offers a new twist on credit scoring. After analyzing 15 million consumer profiles, the three credit bureaus developed a new model to produce one score from all three bureaus. The result is supposed to be a more simplified, consistent and objective approach to credit scoring than the older models. Because we’re in the early stages of this new scoring model, it’s difficult to say weather it’s any better than the FICO model.
 
However, one thing is certain; even though VantageScore currently exists, lenders are not using it at the moment. Fannie Mae and Freddie Mac (the two primary purchasers of residential mortgages) have yet to approve the new method of scoring. Therefore, no lender is going to use this new scoring model until Fannie & Freddie approve it. How long will this take? You never know how long it can take for a shift of this magnitude to settle into place in the industry. At best, I think VantageScore is most likely a sign of things to come and should provide an improved method of how we price mortgage rates in the future.
 
In the mean time, if your credit score isn’t where you think it should be, try making the following changes to improve your credit profile:
 
If your goal is to improve your credit score, you generally shouldn’t close out accounts. It’s true that having too many open accounts can hurt your score. But once you’ve opened the accounts, you’ve done the damage. You can’t repair it by shutting the account, and you may actually make things worse. Instead, pay down your credit card debt. That’s something that actually can improve your score.
   
If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO score treats multiple inquiries within a 45-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.
 
In the end, the ways to improve your credit score are the same in any case: Correct errors. Pay your bills on time. Pay down your debt. And apply for credit sparingly.
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