Have you heard about the new credit scoring model that has just been released? I have had a ton of questions this week regarding the new version of VantageScore and I know that many of our readers are wondering how this new scoring model will affect them. So, here's the skinny, the scoop, the 411 about the new, potentially exciting version of VantageScore. First of all, for those who are confused, let me explain exactly what the VantageScore is and how it is used.
VantageScore is the credit scoring model created by the 3 major credit bureaus - Equifax, TransUnion, and Experian. A credit score is a number which represents your creditworthiness, a number that lenders rely upon when deciding whether or not to loan you money for a car, a home, etc. If you visit one of the 3 credit bureau's websites and pay to pull your credit report you can receive a copy of your VantageScore. However, while VantageScore is used by some lenders, the vast majority of lenders will look at your FICO credit score anytime that you apply for a loan. (FYI, if you want to access your FICO scores you can do so for a fee at www.myfico.com, but only from 2 of the 3 major credit bureaus.)
FICO scores and VantageScores are different because they use different scoring models to determine a consumer's credit score. The range of a FICO score is between 300 and 850. Previously, the range of a VantageScore was between 501 and 990. However, under the new VantageScore 3.0, the scoring range is being changed to match FICO's range of 300 to 850. I believe this is a great move for consumers because it will help to reduce some confusion with regard to credit score ranges. Still, even though the scoring ranges will match a consumer would still have a different VantageScore than his/her FICO score. For example, if Joe Consumer has a 680 VantageScore under the new scoring system he will not automatically have a 680 FICO score. The reason for the score difference is because both VantageScore and FICO have different scoring models - an action (i.e. paying off a collection account) may trigger a score increase under one model, but no increase under the other.
The most exciting change for consumers under VantageScore 3.0 is how the scoring model treats paid collection accounts. The previous version of VantageScore would factor collection accounts into the credit score for 7 years, even if the collection account was paid or settled by the consumer. So, under the previous model a collection account with a $0 balance would hurt a consumer's credit scores. VantageScore 3.0 will NOT factor paid/settled collection accounts into a consumer's credit score. A consumer who has $0 balance collections on his/her credit report but no additional negative activity will likely see a significant increase in their VantageScore. This is a very big change and, in my opinion, great news for the consumer.
Unfortunately, as I mentioned above, this change only applies to VantageScore 3.0, not FICO. Since the large majority of lenders currently use a FICO scoring model the new changes will probably not help someone who is applying for a mortgage or a vehicle. We can only hope that, in the future, FICO follows suit and changes their scoring model as well or that more credit grantors begin to adopt the VantageScore for use in their lending decisions. I would not expect any immediate changes, but I do believe the new VantageScore scoring model is a win for consumers.
Michelle Black is an 11+ year credit expert with HOPE, the credit blogger at www.HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.