No Matter the Formula, Keep Credit Score High

Kathy M. Kristof in her article No Matter the Formula, Keep Credit Score High provides good background reading for anyone who ever wondered what your FICO score really says about you.

"The nation's big credit reporting agencies announced last week that they were launching a standardized credit score — with grades from A to F — to make it easier for both lenders and consumers to understand the often misunderstood ratings.

The new VantageScore from Equifax Inc., Experian and TransUnion is intended as an alternative — and competitor — to the three-digit FICO score calculated by Fair Isaac Corp."

During the credit and housing bubble, lenders have come to rely on FICO scores for virtually all credit making decisions - at least in part because lenders as a group have little or no experience in long-term lending like the community bank manager of old. Loan generation has become a get-rich-quick scheme with no-one accountable for the questionable practices going on today. The loans are packaged up and "securitized" so individual loans aren't being scrutinized too closely.

That said, it is interesting and important to understand how you and your kids are being judged for financial stability and creditworthiness. This article goes into considerable detail about the specific financial information that goes into the FICO score calculation. What is also instructive is the amount and kinds of data that they have available to make these calculations - pretty scary.

I don't know what the impact of a "simpler" score will be but I doubt that it will be good. Being one of only six possible risk categories based on the proposed A-F letter grade lumps you into a very big pot. Even if they adopt a +/- scheme like high school grading, the granularity is still pretty course. I suppose it makes it easier for the sub-prime lending employees and borrowers for whom the current three-digit FICO score is too complex.