Credit scoring methods have become increasingly confusing…
Looking to cut their losses, credit issuers are closing accounts, slashing credit lines and leaving consumers with lower credit limits. To make matters worse for consumers, most lenders are now demanding a score of 720 or higher to secure a new line of credit. As scores are increasingly more important, they have also become increasingly confusing. “One of the things consumers have to understand about scores is that there are a number of different scores within the marketplace,” said Norm Magnuson, vice president of public affairs at the Consumer Data Industry Association, a trade group. Consumers may find it difficult to learn which score lenders use to evaluate their credit-worthiness.
Three agencies, TransUnion, Experian and Equifax, keep consumer credit reports. TransUnion scores can be purchased by lenders but not Experian scores. In 2006, the three agencies united to create VantageScore, which is also sold to lenders to help determine consumer credibility. However, lenders tend to use the FICO score, developed by a Fair Isaac which is a compilation of the three consumer credit reports and consumer debt and payment history.
Experian and TransUnion disclose on their websites that their score is not the same as a FICO score. The formula for the FICO scores is regularly updated, adding more confusion as the score then varies. The lenders can choose to buy the new or an older version of the formula; they sometimes choose on an older version, if its cheaper and easier. “The lenders using scores from an older version, they’re not using bad scores,” said Craig Watts, a spokesman for FICO. “They’re still doing the job but not doing it quite as well as the newer version.” Watts recommends getting FICO scores at Equifax.com or myFICO.com.
Complicating matters is that Experian and TransUnion have developed their own scores, which the agencies call ‘educational’ scores that are intended to help consumers gauge their own creditworthiness. Susan Henson, a spokeswoman for Experian, said the ‘educational’ scores are still a good tool for consumers, even if they are not what lenders use. “The most important thing is they’re really measuring the same thing, which is that consumer’s level of risk, whether they are an extremely low-risk consumer or whether they are a high-risk consumer,” she said. Some consumer advocates see little use for the educational scores making people believe they are better off than they are. Large gaps between the educational scores and the FICO scores are not unusual, possibly giving people a sense of financial health where it doesn’t exist.
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