Your Credit Report...

[admin]

What Creditors Are Looking At

Imagine holding a fistful of $100 bills. Now, imagine placing them very carefully in a shredder, and watching the machine tear them apart.

Not pleasant, is it?

Credit reports and scores are designed to help creditors avoid making this same mistake.

When consumers request lines of credit from banks and other financial entities, they are asking that particular institution to hand them large sums of money – sometimes hundreds of thousands of dollars – and often without any collateral. Credit reports allow these institutions to evaluate a consumer's credit worthiness based on past money dealings with other lenders. It shows whether a consumer has a good record of paying back debts or whether they are unreliable. These potential creditors can then evaluate whether or not they want to risk loaning money to that particular consumer.

Credit reports and scores are very valuable measurement tool to creditors. By allowing potential lenders to measure risk, they enable businesses to calculate specific interest rates, reward highly credible consumers, avoid high risk losses, and establish equitable standards for lending practices.

Unfortunately, not everyone agrees on how credit should be calculated. Most reports and scores originate from the 'big three' credit bureaus, known as Experian, Equifax, and TransUnion, and are calculated according to the traditional FICO model. However, as credit use and access evolves over time, some facets of the FICO algorithm have caused concern over the fairness and impartiality of credit scoring.

This has given rise to new scoring methods such as the Vantage Score, NextGen 1.0 and NextGen 2.0 models. These models have taken into account various modern consumer trends and adapted accordingly.

The Vantage Score method, introduced in 2006, varied widely from traditional FICO scoring. Instead of offering a range from 300 to 850, Vantage Scores vary from 501 to 990. Instead of providing specific credit score information, the Vantage method assigned a letter grade to specific score ranges. These letters ranged from A to F, similar to a school report card.

Vantage Scores are offered by all major credit reporting agencies, including TransUnion, Equifax, and Experian.

Released in 2008, the NextGen 2.0 scoring method replaced the previous 1.0 equation. It is a close relative of the traditional FICO score, offering a range from 300 to 850. It is calculated in the same exact method as the FICO score.

The primary difference is that NextGen 2.0 is more forgiving and takes into account new consumer trends such as shopping for the best interest rates. Whereas traditional FICO scores can be reduced by as much as 10% due to frequent new credit inquiries, the NextGen 2.0 model considers all auto loan or mortgage inquiries within a 45 day period to be one inquiry. This avoids the dramatic reduction in score experienced by many credit-savvy consumers.

NextGen 2.0 reports also ignore all collections and public records below $100. It also lowers the minimum length of credit from six months to three months, increasing the population that can be scored by 2%!
Fair Isaac Company, the company responsible for the creation of the credit score, estimates that these new changes could increase consumer's scores by 5 – 15%. Higher scores mean lower interest rates and more accessible credit.

Using NextGen scores, creditors can increase approval rates by as much as 5% without increasing losses. During project testing, Fair Isaac Company found that the NextGen algorithm correctly identified 23% more future heavy credit users than the classic scoring model.

It uses eighty predictive variables to identify future risks, which more accurately classifies consumers. In traditional FICO scoring, consumer risk status is determined by their worst delinquency, meaning that a consumer who fell into arrears on two out of ten accounts receives the same evaluation as a consumer who defaulted on all ten accounts. NextGen scoring classifies more clearly, so that these two consumers would not be considered identical risks.

NextGen 2.0 provides consumers with a fairer score that allows lenders to more accurately assess the risk. The predictive power of NextGen 2.0 is vastly increased, because it measures credit according to how credit is shopped for and used today.

by
thelinnicole