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Business // Thinking Smart
David S. Chang

New Credit Scoring Makes Sense

Your credit score is one of the most important numbers to manage since it determines your credit-worthiness and the likelihood you will pay back a loan. The Fair Isaac Corporation Score (FICO) is the best and most widely used credit score in the U.S. The FICO Score is based on:

* 35 percent – Record of paying bills on time
* 30 percent – Debt-to-income ratio
* 15 percent – Credit history
* 10 percent – Credit mix
* 10 percent – Recent credit inquiries

In 2006 the three main credit bureaus, Equifax, TransUnion and Experian, joined together to create another credit scoring model called the VantageScore model. The purpose was to use a more advanced credit model and analytics to determine a credit score. Recently a new version, VantageScore 3.0, was released with some changes that could give consumers a better chance of being approved for a loan with competitive rates and terms. Here is what the new changes can mean for you and the difference from the FICO score.

* Protecting your score from natural disasters. If you have had to leave your home or lost a business from a natural disaster, the new VantageScore has the ability to ignore the negative aspects caused by it. The lender notes via a code that a consumer’s account was impacted by a natural disaster, not negatively affecting the credit score.

* New scoring range. In the past, the VantageScore ranged from 501 to 990, causing some confusion since the more commonly used FICO’s range is from 300 to 850. A 720 score for FICO is great, but not as great with the old VantageScore. The new version mirrors FICO’s scores to eliminate any confusion.

* Paid and settled collections ignored. The new score ignores paid or settled collections during the scoring process. Even though these collections show a $0 balance, they stay on your credit report for seven years, negatively affecting your score as if they still had a balance due. With the new changes however, $0 collections will not exist, meaning that some credit scores will increase significantly.

* More people will have a credit score. In order to have a FICO credit score, your file must meet minimum standards such as containing at least one account that is at least six months old and at least one account that has been updated in the past six months. But there are younger people just starting out or those who are good with money but have never used credit before who will not qualify for a loan because they have no score. VantageScore has loosened these criteria so 30 to 35 million “unscoreable” consumers now will have a score. This will allow more consumers to apply for loans and also know what their credit score is.

Even with these changes, it is important to constantly monitor your credit score with both Vantage and FICO. Also with FICO, each of the three credit bureaus have different scores based on the information they have.

Visit artofthinkingsmart.com for more information and tips to raise your credit scores.

david@changholding.com

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