You may not have realized it before now, but the truth is you actually have hundreds of different credit scores. Many of these credit scores are routinely relied upon by lenders to predict risk – specifically the risk of doing business with you. As a result and in order to remain competitive, credit score creators like FICO and VantageScore (Introducing VantageScore 4.0) Solutions are constantly working on ways to improve the predictive power of their credit scoring models.
This competitive need to provide the most effective credit scoring model available is one of the primary reasons why you have so many credit scores. Newer generations of credit scoring models are continuously being worked on behind the scenes at both FICO and VantageScore Solutions and some new version is typically released every few years.
VantageScore Vs. FICO
In the world of credit scoring there are 2 powerhouse companies who undisputedly dominate the market place. These 2 companies have already been mentioned above: FICO and VantageScore Solutions. Whenever you personally pull a credit score online or whenever a lender pulls your credit score as part of an application for new financing, the odds are extremely high that the credit score purchased will have been created by 1 of these 2 companies.
Let’s start with a little background information about the (relative) newcomer to the world of credit scoring: VantageScore. VantageScore Solutions was created in 2006 by Equifax, TransUnion, and Experian – the 3 major credit bureaus. The company creates and sells VantageScore brand credit scores, scores which are largely used by consumers but which are also reportedly being sold to an ever-increasing number of lenders as well.
FICO, on the other hand, has been creating FICO brand credit scores since 1989. The vast majority of lenders currently use FICO credit scores when screening new applicants for financing. Additionally, the mortgage industry has used FICO scores almost exclusively since Freddie Mac and Fannie Mae (the GSEs) mandated the use of FICO scores in the mid 1990s.
Of course VantageScore is hard at work trying to tap into more and more of FICO’s lender market share as well. The company’s newest credit scoring model, VantageScore 4.0, was designed with that purpose in mind. The team at VantageScore Solutions has worked hard to create a bigger, better credit scoring model and the enhancements being introduced in this version have many lenders paying close attention.
VantageScore 4.0 Features
Most of the time when a newer version of a credit scoring model is created the differences between the new version and the previous version are not necessarily all that exciting. And while it is true that VantageScore 4.0 certainly has many similarities to its predecessor, VantageScore 3.0, there are also a number of new features which are quite impressive as well.
- Trended Data
Let’s start with the biggest enhancement which has been added to VantageScore 4.0 – trended data. VantageScore 4.0 will be the first credit scoring model to consider trended data into the calculation of your credit scores.
In case you are wondering exactly what “trended data” is and why it is such a big deal, here is a short explanation. A few years ago the credit bureaus began including a 24 month payment history on credit card accounts. The inclusion of this historical payment data provided lenders and credit score developers with the tools needed to discover whether you are a transactor (someone who pays off your credit card balances each month) or a revolver (someone who carries a credit card balance over from one month to the next).
Why do lenders care whether you are a transactor or a revolver? They care because it helps them to predict risk more accurately and because predicting risk more accurately can help lenders to become more profitable. Studies have shown that revolvers (those who do not pay off their credit card in full each month) are between 3-5 times riskier than transactors. This is extremely valuable information. However, prior to VantageScore 4.0 no credit scoring model have ever harnessed the powerful predictive data available through considering trended data.
- Medical Collections
VantageScore 4.0 was designed to ignore all medical collections which are less than 6 months old. The premise behind this change is most likely to avoid penalizing consumers for medical collections which may have appeared unfairly on their credit reports (in other words medical bills which were supposed to be paid by an insurance company). In addition to ignoring newer medical collections, those medical collections which are actually considered will now be less damaging to a consumer’s credit scores when compared with other types of collection accounts. This is a departure from the manner in which medical collections were treated under previous versions of the VantageScore scoring model.
- Judgments and Public Records
As part of the National Consumer Assistance Plan (NCAP) the 3 major credit bureaus all agreed to enhanced record keeping procedures when it comes to verifying public record information about consumers, specifically with regard to tax liens and judgments. To make a long story short, because of the NCAP agreement the majority of tax liens and judgments are being removed from credit reports. For this reason VantageScore 4.0 was designed to give these public records less of a negative impact than they received under previous scoring models. Translation: tax liens and judgments will hurt credit scores less under VantageScore 4.0 than they did under previous VantageScore models.
Patience Is Still Required
While the changes taking place under VantageScore 4.0 are certainly exciting for lenders and even for many (though not all) consumers, it is important to remember that you probably will not see this new scoring model being used by a lender for quite some time. It is very expensive and requires a lot of effort for a lender to convert over to a new credit scoring model. You may be able to access your own VantageScore 4.0 online, but you probably will not see the new score attached to a lender’s credit report anytime soon.