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New credit scoring system unveiled, may challenge current FICO credit score system
It may not be long that your great credit score of 750+ will get you laughed out of the bank. Recently, the three major credit reporting bureaus announced plans to introduce a new "VantageScore" as an alternative to the traditional and oft-used "FICO" credit scoring system. Where FICO credit score range from 300-850, the new system is said to generate "credit grades" similar to what we all got in school -- from A to F's. Currently, most lenders consider a FICO credit score of 750 to be "excellent." But a 750 score would apparently translate into a "C" with the new system. The new standardized scoring system that Equifax, Experian and TransUnion have announced is supposed to make it easier for consumers and lenders to better understand the credit scores. Bottom line, it's in your own best interest to keep working toward a high credit score, no matter which system is being used the most, and keeping it there. The higher the credit score, experts note, the lower the interest rate charged and the easier it is to get the loan. People who boast high credit score have more options to negotiate for the lowest interest rates and can qualify for low- or no-fee loans. The savings over the life of the loan can be substantial. As an example, a person with a low FICO credit score will pay about $200 more every month on a $200,000 home loan than someone with great credit, according to Fair Isaac, the company responsible for the FICO credit scoring system used for years by lenders to rank one borrower against another, judging them for credit risk. The hypothetical borrower above would pay over $70,000 more over the life of his loan than the higher-credit borrower would. The difference -- and importance of -- these examples underscore how important having a good credit score can be. Details of VantageScore have yet to be released. Nobody knows yet exactly how these scores will be assembled, though rumors are rampant that now people will be judged harshly for late utility or cell phone payments, where that has never been a factor with FICO credit scores in the past. So, at least for the time being, keeping aware of where your FICO score ranks is your best bet in getting better loan rates. Your FICO credit score is basically broken down in several different areas: You will be placed into one of 10 credit categories according to your actual use of credit. people with lots of credit are compared to others with lots of credit. People who have limited credit are compared to similar people, etc. Sounds fair so far. They then assign you a neutral score — about 600 points, according to a Fair Isaac spokesman -- and then add or subtract points according to "good" or "bad" use of credit. Their scoring is impartial. They don't know who you are, and have no agenda other than to score your past credit habits and give lenders a snapshot of how your credit history will play into your ability and intentions of repaying future loans. What's in your credit file is what determines what score you get, so it's important to know what's in your credit report from each of the three credit bureaus and take action to remove errors or outdated information showing up there. These discrepancies mean that it's very common to learn that your FICO score at Equifax is different from TransUnion, which again could be different from your Experian score. The differences might not vary widely, but there are usually differences just the same. Plus, variations in the FICO formula affect the final scores, depending on which of 10 categories you are placed into and which credit bureau provides the credit report. Most importantly, there are five things that account for the bulk of your FICO score: 35% of your FICO credit score focuses on past credit repayments. You get points for paying bills on time, and you get points subtracted for paying bills late. It's that simple: pay your bills on time and fully one-third of your FICO credit score will shine. You have full control of this, so make the decision from now on to never miss a payment. Ever! You also will have points subtracted for non-payments and restructured payments — actually, negotiated payments where the lender takes less than originally agreed — as well as bankruptcies. The more severe credit problems deduct more points. As an example, you'll lose more points for a bankruptcy or a write-off than you will for being late with a credit card payment. 30% of your FICO score is based on the ratio between how much you owe and the total available credit your currently have. You'll have a higher score the lower this ratio appears. For instance, if you can keep this ratio to 25% or less, you will score higher than someone who maxes out credit cards of has little or no home equity. We believe that getting rid of unused credit cards is your best bet to getting control of your financial life. But canceling a long-held credit card can actually lower your available credit line, and could possibly lower your crdit score because these ratio could be negatively affected. Some experts recommend keeping the cards to help raise the ratio. Problem is, having the card available can make an undisciplined credit card addict run up another high balance, and then you're in the same -- or worse -- predicament again! 15% of your FICO score is based on your past management of credit, the actually length of time you've borrowed money and paid it back. Having "good" credit here isn't the issue. Someone with limited credit experience, maybe one or two years of using credit, will score lower here than someone who has a credit going back decades, even though there could have been some "bruised credit" somewhere along the way for the second borrower. Long-term, proven credit usage is what is being measured here. 10% of your FICO score measures how many different types of credit a borrower has handled successfully in the past. You've borrowed money to buy a home, buy a car, pay for a college education, and you've applied for several credit cards that you've paid religiously every month... your score will be higher than that person who has only applied for a car loan. Having a broader range of credit experience will help in this area. Your credit report or credit file will typically reflect past car and home loans that you've taken on and paid off for many years. There are no penalties for having used credit in the past, so long as the payments were made on time. If, however, there were late payments or write-offs, you'll need to take action to try to minimize these entries. If your position is that the payments were not late or that there were mitigating circumstances, you do have options to add a short written consumer statement to your credit files. 10% of your FICO score is depends on how many times your credit file is looked at, and this is most infuriating for me. I personally have seen where my credit report is "dinged" for too many credit inquiries, especially when I had simply explored refinancing options a few years back. Every mortgage broker I called to get home loan quotes pulled my credit report, and one pulled it twice. These inquiries weren't supposed to affect my score, but the actual score started to go lower. Note: The inquiries you make to check your own credit aren't supposed to affect your final FICO credit score, although they do show up. Also, inquiries made by your employer or your insurance carrier checking up on you don't affect your score -- only when you are seeking to borrow money is the inquiry designed to add a permanent record of this activity. Everytime a person applies for credit, a credit query will show up in their file. The problem it seems is that having a number of those inquiries in a short period of time will make this final portion of your FICO score suffer. And the reason has to do with statistics, according to the folks at Fair Isaac: those who apply for large lines of credit in a short period of time have been shown to be 800% more likely to file for bankruptcy. See what others are saying about this new credit scoring system:
From gfn.com......
From bankrate.com...
From The Mercury News...
From Business Week...
From MSN.com
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