Once upon a time, when FICO was the only option available, understanding your credit score was only moderately confusing. Given that creditors now have a choice of scores to provide a consumer, it has become more challenging for consumers to understand their credit scores. Although it is commonplace to talk about credit scores, too few of us really understand what we are talking about.
Welcome to the ever-evolving world of credit!
Start with the basics: FICO versus VantageScore
Let's break it down a bit and talk about one aspect of this complex subject — the fact that there are now two sources for credit scores.
Many of you and your students are familiar with the FICO score, formulated by the Fair Isaac Corporation. The FICO score has been around since 1956, and was the only credit score available until 2006. Up until that time, all three major credit reporting agencies (Equifax, Experian, and TransUnion) delivered a version of the FICO score to its customers.
Then those three agencies developed a competing scoring mechanism they call the VantageScore. The VantageScore has been available for five years now. Much like the FICO, it also has a scoring formula, except that it offers different categories with different weights, along with a different scoring range (FICO 350-850, Vantage 501-990).
Just when we thought we had this scoring thing down!
The situation all consumers find themselves in now is that whether they receive a VantageScore or a FICO score depends on the agency from which they request their credit score. Credit reports do not include credit scores. And, although each consumer may request one copy of their credit report at no cost from each credit reporting agency once per year, the credit reporting agencies can charge a fee for providing a credit score.
Each credit reporting agency chooses which credit score it will offer to the consumer. Currently, Experian and TransUnion are providing the VantageScore, while Equifax is still using its version of the FICO score when consumers obtain their credit scores directly from its website.
Two scores can lead to confusion
Now, why do you and your students need to know about the two scores? How does this affect someone seeking to apply for credit? Well, it is perhaps easiest to say that the effect can be pure confusion!
Let's say a student purchases a FICO credit score through Equifax, but the lender from which he or she wishes to request a car loan or credit card uses the VantageScore to determine the student's creditworthiness. In this case, the student is operating under the false assumption that he or she knows the information the lender intends to use to formulate a decision on the credit application.
So the student did his or her homework by researching the likelihood that the student's FICO score would generate a positive response; but, what an unhappy surprise to receive a rejection notice from the lender!
What did the student do wrong? Nothing! The student understandably but incorrectly assumed there was only one score available, and believed that both the student and the lender were looking at the same figures.
Sorting it all out
So, what to do? Here are a few suggestions that might make the credit score mania a little less manic.
First, when a student is contemplating an application for a car, a credit card, or a mortgage loan, he or she can contact the lender and ask which score (FICO or VantageScore) the lender uses to make credit decisions.
Second, a student can then pull his or her own credit reports beginning at the only authorized source for a free annual credit report, www.annualcreditreport.com. He or she can choose to receive the credit report from the agency that provides the same type of score the lender will be reviewing.
Third, the student can request his or her credit scores from the agency or agencies that provided their credit reports. The student will have to pay for those scores. Students can also go directly to myfico.com to receive their FICO scores, but there is no direct option for receiving the VantageScore.
Fourth, the student can review his or her reports for any discrepancies. It's a good idea for a student to fix whatever he or she can before applying for credit.
A tale of woe? Or a tale of success? This tale of two scores can end happily. These few steps can help your students sort through the credit score craziness. And who knows, you might end up with a few little "e-tales" (emails) of appreciation!