Credit Issues by Jeff Mandel and Marlin Brandt

RISMEDIA, July 2, 2010—The economy is looking up and you want to take advantage of some great home-buying opportunities before they disappear. Interest rates are still low for people with excellent credit, so you update your records and purchase your credit report from a reputable credit report provider. Your credit score on the report is 920. Next you apply for a home loan to get pre-approved for a specific amount of money before you start shopping for a home. Your lender calls you back and your credit score had dropped to 801 overnight!

What Happened?
First, you need to understand a little about credit scores. Your credit score is a three-digit number that helps lending institutions assess their risk associated with lending you money. Credit scores are used for home loans, auto loans, personal loans and credit cards. However, it doesn’t end there. Your score may also be considered for non-lending purposes, such as new utility services, cell phone services, renting an apartment, a lease, auto insurance and even to assess your character as part of a new job background check. People with lower credit scores may pay higher interest rates or may not be approved at all. Whereas, those with higher, less-risky credit scores often qualify for lower interest rates and special options. Credit scores are calculated based on computer “predictability” models. These models are designed to compare and analyze credit information and credit utilization patterns from your credit report against thousands of other consumers. The data is then evaluated using a complex mathematical algorithm that generates a credit score the moment a report is ordered. There are literally trillions of score combinations used in the calculations. Most credit scores are calculated and provided individually by each credit bureau, including the three major ones in the U.S., which are Experian, Equifax and TransUnion. Additionally, many lenders use third-party credit scoring systems, such as FICO, NextGen, CE Score and VantageScore. For consumers, the variations in scoring models and score ranges can create some confusion.

In 2006, the three major bureaus joined forces to create a single credit scoring system called the VantageScore. The VantageScore and FICO model lead the industry as competitive rivals in credit-scoring systems.

VantageScore provides a standardized universal mathematical formula to create a credit score from data found on reports from the three major bureaus. Your VantageScore may not be exactly the same if your lender only orders a credit report from one of the bureaus. This is because the data each bureau receives may be slightly different.

As an example, if your auto loan lender does not report your payment history to Equifax but does report it to Experian and TransUnion, it will create a difference in scores. In theory, the VantageScore should be more consistent across all three bureaus since the mathematical formula is the same.

Unlike FICOs traditional 300-850 credit score range, the VantageScore ranges from 501-990. There is no true way to compare the results of the VantageScore to a FICO score especially when the formulas are constantly changing. However, to put some perspective in place, a 650 FICO score approximately compares to a low, 800-range VantageScore.

Although the exact formulas and algorithms for calculating credit scores are closely-guarded secrets, FICO and Vantage do provide general key characteristics that drive their credit scoring models. The one constant for both scoring systems is that paying your debts on time will typically be the primary factor that positively impacts your credit score.

Please contact ApprovalGUARD at http://www.approvalguard.com with any questions or any assistance with more effectively self-managing your credit.

Jeff Mandel is president and Marlin Brandt is COO of ApprovalGUARD.

For more information, visit http://www.ApprovalGUARD.com.