Credit Rules Change

Sooner or later, most everyone has to come to grips with their credit score. By giving lenders an idea of whether you're likely to pay your debts, the state of your credit score can determine if you will qualify for a credit card to finance household items like furniture or appliances and what kind of interest rate you'll pay on a home or car loan.

Until recently, consumers were likely to get a different credit score depending on where they went to get it. The three major credit reporting companies — Equifax, Experian and TransUnion — each used their own proprietary methods to determine scores.

Now, however, things have changed. Earlier this month, the three companies have adopted a uniform rating system, called VantageScore. The new scoring system is intended to make it easier for lenders to gauge a borrower's credit risk and simpler for a borrower to assess his or her financial health.

VantageScore generates a rating of between 501 and 990 points and assigns the score a letter rating of A through F — much like a grade on a school report card. As before, the higher a consumer's credit score, the better credit risk he or she is.

The point and letter-grade scales correspond like this:
• A: 901 to 990 points
• B: 801 to 900 points
• C: 701 to 800 points
• D: 601 to 700 points
• E: 501 to 600 points

But generating a credit score is still far from an exact science. Scores may still vary between reporting companies, because differences still exist in the kind and amount of information the companies gather, and in the information they already have, said Ron Ares, a Portland-area Realtor and writer of the real estate affairs blog www. repdx.com.
"There still may be some differences in scores between companies based on what credit histories they have already compiled," Ares said. "But now, their methodologies will be the same. That's the benefit of the new system."

Further, Ares said, about three-quarters of mortgage lenders use a different scoring system of their own, called FICO. Equifax, Experian and TransUnion have begun pitching VantageScore to lenders, in the hope that a universal system may one day be adopted by both camps. Lenders aren't expected to begin using VantageScore in significant numbers for at least several more months.

"I don't know how the new system will impact how the FICO scores are calculated, or if it will at all," Ares said. "They're kind of competing right now. It'll take some time for the FICO-vs.-VantageScore situation to be straightened out in terms of lenders."

But regardless of how widelyusedthe VantageScoresystem becomes, it won't change the things that first-time buyers need to do to clean up their credit histories in order to become more attractive to lenders.

"A credit score is less a concern for a first-time buyer than knowing their credit history and keeping that cleaned up," Ares said. "In my opinion, I don't think the new scoring system will have that big an impact for first-time buyers."

According to the Federal Trade Commission, would-be-borrowers can take a few simple steps to improve their credit histories:
• Pay your bills on time. Credit ratings can be negatively impacted if you've paid bills late or had an account referred to collections. Settle any outstanding bills if at all possible by writing to your creditors and showing your willingness to make good on your debts.

• Know your outstanding debt. If the amount you owe is near your credit limit, this can have a negative effect.
• Build a track record. Generally, the longer your credit history, the better your credit rating, although timely payments and low balances can offset this factor.

• Don't apply for too many new accounts at once. If you've applied for too many new accounts in the recent past, the number of "inquiries" on your credit history can have a negative effect.

• Don't have a lot of credit cards. Spreading your credit card debt over many accounts can be a red flag.
Above all, Ares said, be aware of your status. Under federal law, each person is entitled to a free credit report every year from all three credit reporting companies. But you have to go through the proper channels — the only way the companies are required to give you a free report is if you make the request by phone at 1-877-322-8228; online at www.annualcreditreport.com; or by mail at Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.