When you apply for several types of credit, there is a good chance that all of those lenders use the same basic scoring system: the FICO model. Thus, consumers usually associate a consumer credit score with a FICO score. Some alternative models exist and even within the FICO scoring system itself, different versions abound.
Identification
About 75 to 80 percent of all lenders use an algorithm developed by the Fair Isaac Corporation (FICO), according to CBS News. The actual formula to the FICO model is a closely guarded traded secret, but we do know the basics of what affects scores. Payment history and debt load are the two most important pieces to the equation. Types of credit used, new credit and how long a consumer has used credit round out the rest of the categories in the formula.
Considerations
The Fair Isaac Corporation constantly tweaks the variables in their formula, and lenders do not receive scores from the credit bureaus or FICO but with software that uses data from a person's credit report. Thus, some lenders may use an outdated version of the FICO formula, meaning your FICO score can vary from lender to lender.
Alternative Scores
The major credit bureaus are always looking for a way to break the stranglehold of the FICO score on the credit history, so some alternatives exist but lack the consistency and trust in the FICO model. The VantageScore, a model developed and promoted by the national credit bureaus, has a little less than six percent of the credit scoring market as of 2010, according to Bankrate. Some lenders use credit histories from the major bureaus, but develop an in-house scoring system for the actual risk score.
FICO 8
As of 2011, the FICO 8 system is the latest FICO model and will likely become the industry standard. Nearly 3,000 lenders already upgraded their software to FICO 8. This system hurts consumers a lot less for the occasional 30-day late payment and ignores outstanding accounts with a balance less than $100. Additionally, it places more importance on your usage of available credit card limits.
0 comments:
Post a Comment