Over here, we focus on traditional credit scores, which put simply, are a measure of a borrower’s default risk.
In short, the lower the credit score, the higher the chances of default. And vice versa.
While this may seem relatively simple, the clandestine nature of credit scores has left many consumers in the dark about where they stand and why.
Sure, you may know that you have a 680 credit score or a 780 credit score, but you may not know what it means and why.
You can look up your score using a credit score scale and determine if your credit score is good, bad, or just average, but it still takes a bit of work and leaves a lot to interpretation.
Enter the Credit Grade
Lately, there’s been a call for something a little more straightforward, aside from that cryptic three-digit numerical credit score.
Now we’re seeing credit score grading systems, similar to the ones we all know and love from our school days.
So instead of trying to wrap our heads around seemingly random three-digit numbers like 730 and 780, we can make sense of things with letters we’re all too familiar with.
VantageScore was actually the pioneer in this arena, with their letter grade buckets, ranging from “A” to “F.”
Just like in school, “A” credit grades are the most sought after, while “F” credit grades should be avoided like the plague.
The beauty of VantageScore is that they give you both a numerical score and a credit grade, so you can take both and make better sense of where you stand.
Unfortunately, VantageScore still isn’t widely used, as Fico holds the lion’s share of lender and creditor contracts.
42% of Americans Prefer a Credit Grade
But a new study from Freescore.com, a provider of free credit scores, revealed that nearly half of Americans polled want a credit grade to go alongside their credit score.
However, Fico scores only come in numerical form, so these consumers are out of luck if they want a Fico score grade, at least at the moment.
It’s possible that Fico will have to cave to pressure and add credit grades in the future to compete with the likes of VantageScore.
At the same time, 30 percent of consumers in the survey still prefer to view traditional credit scores provided by the three major credit reporting agencies.
But I wouldn’t be surprised if over time we need a blend of both as things become more transparent.