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A new way to measure credit score

By Steve Bucci ·
Monday, October 7, 2013
Posted: 4 pm ET

Earlier this year, VantageScore launched a new way to measure credit scores that could be especially useful for people with little to no credit history.

Its "3.0" model joins an already crowded field of scoring models, though VantageScore says it'll be an improvement over the others. The credit scoring company, which was established in 2006 by the three major credit bureaus, Equifax, Experian and TransUnion, says the new model can formulate scores for as many as 30 million people who might have had trouble getting a credit score (and therefore a loan) elsewhere.

VantageScore likely developed 3.0 because it wanted a more precise analytic tool than other models, including those created by FICO. I'd bet the bureaus also were tired of being blamed for posting results that were based on a rival's scoring model.

VantageScore vs. FICO

The 3.0 model is a major shift for VantageScore.

Its earlier models used a different scoring scale, running from 550 to 990. They also had some easy-to-understand letter grades: "A" stood for great, while "F" meant high risk. This made the score easier for the public to interpret. The new 3.0 version strips out some of those unique traits, making it easier to compare with FICO. It uses a 300 to 850 scoring range with 850 being the best. The letter grades, which pleased the teacher in many of us, are gone.

But there are still some differences between FICO and VantageScore. While the models both generate scores based on the information in your credit reports, they differ in how they arrive at your score.

FICO, the standard-bearer in the credit scoring industry, has created numerous scoring versions in its lifetime. Each one generates a different score, depending on the type of loan requested and the credit bureau that prepares the score. VantageScores aren't affected by the credit bureau or the type of loan.

Advantages for credit score newbies

VantageScore also can be helpful for the millions of people who don't have enough credit history to get a FICO score.

FICO requires at least six months of credit history and reporting activity on at least one account before it generates a score. VantageScore requires only one month of history and reporting activity on at least one account within the past 24 months to generate a score. This shorter scoring threshold will allow many more people who live on the fringes of our credit and banking system to be able to generate a score than in the past. VantageScore also will use information on rental history and utilities if it can find those details in the credit reports.

The weightings that are used to translate your history into a score vary considerably. FICO most heavily weights payment history, followed by how much you owe. VantageScore believes that the most important predictor of your near-term default risk is your history, followed by how long you've been using different types of credit, and how much of the available credit is actually used.

In the end, it is the consumer who will benefit from this new competition by having more than one way to accurately predict risk, and to be able to do so with less of a credit history.

Have you checked your credit score recently? Do you know if the score came from FICO or VantageScore 3.0?

Steve Bucci is Bankrate's Debt Adviser and the author of the popular "For Dummies" series books: "Credit Management Kit for Dummies" and co-author of "Managing Your Money All-In-One for Dummies." To ask a question of the Debt Adviser, go to the "Ask the Experts" page and select "Debt" as the topic. Read more Debt Adviser columns and more stories about debt management.

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