Understanding Credit Scores
Recently Corporate Experian made history by unveiling the industry’s first ever Triple Score Business Report. While this clearly marks the beginning of a new trend in business credit scoring I’m curious to see if there will be another business credit bureau that introduces its own version of a triple score business report.
Credit scoring is big business and companies like FICO have been providing its risk assessment technology for years. What really matters is whether or not lenders decide to use one specific platform over another and clearly your FICO score is the choice among most. Or is it?
When it comes to business credit scores each bureau uses its own internal scoring formula. When a lender pulls a business credit file the bureau provides a score. DNB’s score is called paydex while Experian has intelliscore and Small Business Equifax uses a Small Business Credit Risk Score.
It may come as a surprise to you but currently there is no leading business credit scoring system used in the lending industry today.
As a result lenders use FICO as another risk assessment tool in making its business lending decisions along with business credit scores. But will this strategy soon change?
I’m sure you’re aware that the three consumer credit bureaus, Equifax, Experian and Transunion formed Vantage Score Solutions as a joint venture in 2006 to offer choice and competition in the credit score marketplace.
FICO responded with a lawsuit against the credit bureaus for trademark infringement which I covered in my post FICO vs. Credit Bureaus. It was no surprise that Vantage Score Solutions had a complete legal victory over FICO in this lawsuit.
It was interesting to read Vantage Score’s President and CEO Barrett Burns’ congressional testimony on understanding credit scores yesterday. It was evident that he wanted to show the advantages that Vantage Score provides over all other scoring models.
In particular he was addressing segments of the population who has a hard time obtaining credit because they are unable to have a credit score calculated with the current scoring models.
This was broken down into the following categories:
1. Consumers who have less than three accounts in their credit file are considered to have a ‘Thin File’. Between 35 and 50 million consumers in the United States – 18 to 25 percent of the adult population – may be considered thin file; and, therefore, often underserved;
2. Infrequent credit users, who may not be eligible for a credit score because there has not been new activity on any credit account for six months; and,
3. New consumer profiles that are just establishing credit relationships and have not had credit open for more than the six months which is required by some of the traditional scoring models.
What was exciting was the Vantage Score model showed an 8 percent increase in credit scores for 10 million consumers after doing a random score check. What’s even more impressive was 2.5 million consumers from that study were considered a much higher credit quality than subprime.
Since Vantage Score was introduced they have made some significant gains in the marketplace that not only benefits consumers but also small business owners as well. Here is a quick overview of the lenders now using Vantage Score:
- 4 of the top 5 financial institutions
- 8 of the top 10 credit card issuers
- 3 of the top 10 mortgage originators
- 7 of the top 50 auto lenders
With literally hundreds of credit scores and scoring models used by lenders it’s important for you to be fully aware of where you and your business stand across the most widely used models. Be sure to check your FICO score , Vantage Score, Paydex Score, Intelliscore and Small Business Credit Risk Score so you can be fully prepared when applying for financing.
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About the author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The New York Times’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.