New Credit Score System Supposed to Simplify, Not Confuse

Posted by Nick Niesen on November 8th, 2010

A lot has been written in the past few years about the importance of both credit reports and credit scores. The credit report is a listing of all significant financial transactions by a consumer and whether or not those transactions were completed on time and as agreed. The score is a distillation of everything contained on the credit report, boiled down to a three-digit number. That number is supposed to indicate to a creditor or a lender, at a glance, whether or not the consumer in question is worthy of another loan.

Until recently, the three major credit bureaus, Experian, Trans Union and Equifax, all used different but similar systems to devise the credit score, which ranged from 300 at the low end to 850 at the high end. The different systems meant that a consumer checking his or her score with each of the credit bureaus would receive three different credit scores. This led to some confusion as to which score was the "correct" one. The bureaus have recently attempted to solve that problem by creating VantageScore, a unified scoring system that all three bureaus will use. This should result in a consumer receiving the same score no matter which bureau provides it.

But this hasn't entirely stopped the confusion over credit scoring. Unlike the old systems 300-850 range, the VantageScore uses a different scale that ranges from 501-990. In addition to the numeric score, the VantageScore system will also provide a letter grade, ranging from A-F, as follows:

901-990 - A
801-900 - B
701-800 - C
601-700 - D
501-600 - F

Now the source of the confusion has changed. Many people have erroneously assumed that a score in the old system will be transferred to the new system. That means, to their way of thinking, that a top score in the high 700s or low 80s under the old system is now merely "average" under the new one. How, people are wondering, did a top score suddenly become mediocre?

The answer, of course, is that it didn't and that comparisons between the old system and the new one are like comparing apples with oranges. The new system is completely different and will use a new set of criteria to create the new score from the ground up. A score in the 800 range under the old system will almost certainly become a score in the 900 range under the new one. Consumers have no reason to be alarmed, and in time, the new system will be better and more easily understood than the old one. After all, nothing tells you that you have done well better than being told that you have received an "A".