|Volume 6, Issue 2, 2006||Federal Reserve Bank of Dallas|
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New Credit Scoring System
Three national consumer credit bureaus—Equifax, Experian and TransUnion—have introduced a new system, VantageScoreSM, to calculate individuals' credit scores.
Previously, each of the three bureaus used its own unique credit-scoring system, which created potential for wide variances in individuals' credit scores among reporting companies. In response to the need for a consistent, standardized scoring model, the companies now use a single methodology of credit scoring that works across all three reporting agencies' data.
A credit score is determined by the information in a person's credit file. Credit scores enable a lender to quickly tell how likely applicants are to repay their loans or make monthly credit card payments on time. The credit score may also affect the interest rate offered by the lender. Lower credit scores mean higher risk, and applicants with low scores may have to pay higher interest rates. The higher the applicant's credit score, the less risk to the lender. Some insurance companies, landlords and employers also use credit scores to evaluate their applicants' creditworthiness.
The VantageScore system will generate credit scores ranging from 501 to 990. The numerical scores tie to letter grades A through F, just like the familiar academic scale. A score in the 501–600 range equates to the highest risk borrower, with a letter grade of F. A score in the 901–990 range indicates an excellent credit rating—an A.
In the past, credit agencies used a credit-scoring model developed by the Fair Isaac Company. "FICO" scores range from 300 to 850.
Consumer advocates recommend obtaining a credit score before making a major purchase. According to Texas Saves state director Cynthia Nevels, "Families who are unaware of their credit score run the risk of paying more for goods and services."
e-Perspectives, Volume 6, Issue 2, 2006