GOOD CREDIT: Study Notes from a Former Loan Originator

Before the  the financial crisis of 2007; I worked as a loan originator under the National Lending Corporation (New York) and introduced sub prime loans to individuals with less than perfect credit -- which usually meant their FICO or Beacon scores. Are they one and the same? https://www.cafecredit.com/credit-score-range/

I believe in caveat emptor Latin for "buyer beware" http://www.investopedia.com/terms/c/caveatemptor.aspand when I became a loan originator who collected data from clients I created a "what if" hypothesis for better identifying a prime and a sub-prime loan candidate to charge 1 or 2 points (1% or 2% of the loan) to submit to a bank (Countryside). I remember in class writing down this scenario.

Client A: excited to tell us that credit score is 723. To a bank that IS a respectable score. Another Client B who had recently been the victim of identity theft checked her credit and was ecstatic to learn that her score was right at 800, which is as high a score as anyone needs.

Unfortunately, both were misled. Their scores weren’t nearly as good as they thought.

Since 1956, FICO (formerly called Fair Isaac Corporation) has provided credit scoring services to help lenders and creditors evaluate their customers’ creditworthiness.

They created the FICO score, which evaluates a consumer’s credit report and generates a score between 300 and 850.

In 2006, the major credit bureaus, TransUnion, Equifax and Experian, joined forces to create VantageScores to compete with FICO. One of the bureaus, Experian, even went so far as to stop offering FICO score information to consumers. Since then they’ve been aggressively marketing VantageScores, which range from 501 to 999.

Credit scores are designed for lenders, not for consumers, though a consumer can purchase 2 of the three FICO scores to get an idea of whether they will be granted credit and at what terms. VantageScores are also marketed to consumers, particularly when they order their FREE credit reports from annualcreditreport.com. More expanded and explained than https://www.creditkarma.com/ (also FREE)

While VantageScores are a bit less expensive than FICO scores, the overwhelming majority of creditors and lenders use FICO to evaluate potential borrowers, so it is the only score you should concern yourself with. Or is it difirent when you have an excellent business credit profile?http://www.missionmarine.com/Projects/Financial_Success/BCSeBook_howandwhy.pdf

VantageScores unintentionally misled consumers. If you, like the two clients compared didn’t know better and purchased a VantageScore, and learned that it was 723, you might falsely believe your credit is healthy. 723 is a relatively good FICO score, but it’s a mediocre VantageScore. There’s no direct conversion, but a VantageScore of 723 is approximate to a FICO score of 621. 

So in this example, if you are a new client and believe that you have  a score that is just above the line of good credit, and instead finds their credit is right at the cutoff that separates prime from subprime (See infographic What is a Good Credit Score?).

Then...these new credit scores from the bureaus do more harm than good; they create confusion and don’t provide the information that most creditors will be looking at when they evaluate a potential client.

I just finished becoming a personal and business credit counselor (if you cannot beat them join them); I will be working closely with my sponsor(s) and recommends first procuring your annual credit report for FREE from  http://www.annualcreditreport.com web site to get your free report, you will be offered the opportunity to purchase your credit score. We strongly advise that you NOT do this, because it’s your VantageScore that the bureaus are trying to sell you there. It’s not worth paying for. If you’d like to know your score, stick with FICO and visit www.myfico.com.

To learn more about credit scores, check out our Understanding Your Credit Reports and Scores course and our Consumer Guide to Good Credit, both available for free right here in the FIT Academy.