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Understanding Credit Scores

For a system designed to universalize and simplify the evaluation of the average US consumer's credit history, credit scoring has created an unfortunate amount of confusion and misinterpretation. This is primarily due to two reasons. The first is the secrecy surrounding how score figures are derived. What citeria are used? How often do the criteria change? How universally are these applied? Very little information has been forthcoming from financial institutions regarding these variables. The second reason is that there are a number of different scoring systems available and they produce different results. That is they use different criteria and their algorithms are distinct. The score ranges are distinct as well. So one has to be specific regarding which system is being used when a value is evaluated.

The most popular scoring system is the FICO Credit Score. This is used by most lenders, bankers and credit institutions. It is the version that is of most value to check and keep track of. Although all three major credit bureaus (Experian, Transunion and Equifax) use the FICO Score, they had for years maintained their own internal proprietary systems each distinct from the next. Fortunately, in March 2006, the three bureaus introduced a new system to the public, the Vantage Score. This is a joint venture by the three. It is an effort at uniformity as well as an attempt to compete with and provide an alternative to Fair Isaac's FICO Score.

As with the latter though, the system is merely an algorithm and since the data upon which the algorithm is run is different within ieach reporting agency, it is not enough to check your Vantage score at only one bureau.

The Vantage Score also has a different scaling system from the FICO version. For one thing it ranges from 501 to 990 rather than from 300 to 850. Vantage credit levels are given a letter grade from A to F and are defined as follows:

A: 901-990 (Super Prime)
B: 801-900 (Prime Plus)
C: 701-800 (Prime)
D: 601-700 (Non-Prime)
F: 501-600 (High Risk)

The uniformity offered by the Vantage project is long overdue. As we mentioned, the credit bureaus have previously used their own internal systems to generate scores. Experian developed the Plus Scoring System which it still makes available to consumers. Although it is touted by this company, the system is not generally widely used. Individual lenders and insurance companies also have a number of other types of credit scoring available to them.

How does one improve ones credit score? There are several factors involved here centering on judicious use of credit lines and sound financial habits. For more on this topic, see our article Raise Your Credit Score.

For more on Credit Scores: Fico Beacon/Nextgen Credit Scores explained.


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