Credit Scores Vs FICO VantageScores: The Differences Explained

In the not-so-distant past, how lenders determined your creditworthiness was shrouded in mystery. Even with the majority of the veil now pulled aside, it’s probably reasonable to assume that a fair number of consumers receive no formal or informal education on the finer points of personal finance. Money management is generally something you learn as you grow through life. In your teen years, you establish bank accounts. Then you buy a car. Then you buy a home. Along that path, you learn the general mechanics of credit and how it works. But do you know the difference between a credit score, a FICO score and a VantageScore and how lenders use those numbers?

Credit Score Defined
A credit score is a number arrived at in a variety of methodologies and formulas that allows lenders to assess you as a credit risk. Even today there is no particular recognized standard in scoring. A FICO score is a credit score. A VantageScore is a credit score. Lenders might also have their own method for determining scores.

Why is your credit score so important? Your score is with you for life. The higher your score, the lower you are as a credit risk. This affects whether you can borrow money, how much you can borrow, the terms of a loan and how much it will cost you in finance charges.

FICO Score Defined
Fair Isaac Corporation (FICO) was founded in 1956. They created the FICO score as a means to evaluate creditworthiness. Prior to 1956 and until the 1980s, lenders used their personal judgment in determining who was able to borrow money. FICO developed the first scoring system generated on a score between 300 and 850 based on credit history and sold the scores to lenders. It proved to be a lucrative venture.

In the 1980s, FICO built custom software to automate the process. At that point, the three main credit reporting agencies (Equifax, TransUnion and Experian) adopted the FICO score as a loose standard. Due most likely to its longevity, the FICO score still holds its place as the dominant scoring agency.

VantageScore Defined
The “Big 3” credit reporting agencies, Equifax, TransUnion and Experian, eventually got together and decided that it was time that FICO share the wealth. With the market now open to making scores available to consumers as well as lenders, the credit bureaus wanted their slice of the pie. They began marketing VantageScore in 2006. VantageScore is also based on a range of numbers, although those numbers differ somewhat from FICO in that the range is from 502 to 999.

The War for Credit Scores
FICO filed antitrust, false advertising and breach of contract claims against the Big 3 in 2006 to prevent VantageScore from the use of the range of numbers that overlapped with the FICO scoring system. After a four-year court battle, a jury rendered a verdict that a credit score range could not be trademarked. In July 2010, a U.S. District Court Judge dismissed all of FICO’s legal claims, thereby ending the litigation.

The Aftermath for Consumer Lending
It might appear that the outcome of the litigation between FICO and the credit bureaus only complicated matters. However, that is not the case. Request your FICO score and your VantageScore. If you need to borrow money, your best bet is to simply research your lender options. If your FICO score is stronger, look for a lender that uses FICO scoring. If your VantageScore is stronger, seek out a lender that uses the VantageScore score range. And don’t forget to take into account that some lenders use their own score. The effort you expend in collecting the information on your credit scores and researching lenders will pay off in better loan terms and lower interest rates for you.

Risk Analysis for Islamic Banks

For a long time now, the idea of operating Islamic banking has generated a lot of debate or argument, especially in Nigeria which has different religions. I was therefore excited when I was handed this book by a former boss of mine on his return from a World Bank conference in the United States of America recently. At least, reviewing it will shed more light on the supposed grey areas of Islamic banking.

This text entitled “Risk Analysis for Islamic Banks”, published by the World Bank, is co-authored by Hennie van Greuning and Zamir Iqbal. Iqbal is a principal financial officer with the Quantitative Strategies, Risk and Analytics (QRA) Department of the World Bank Treasury. He earned his Ph.D. in International Finance from the George Washington University, where he also serves as the adjunct faculty of international finance. Iqbal has written extensively in the area of Islamic finance in leading academic journals.

As for Greuning, he is a senior advisor in the World Bank Treasury and has worked as a sector manager for financial sector operations in the Bank. He has had a career as a partner in a major international accounting firm and as chief financial officer in a central bank. Greuning holds doctoral degrees in both Accounting and Economics.

Greuning and Iqbal say over the years, the Islamic Financial Services Board and related organisations have invited them to workshops and conferences, allowing them to learn from the many scholars presenting at those gatherings.

Structre-wise, this text is segmented into four parts of 15 chapters. Part one is generically tagged “principles and key stakeholders”, and covers the first four chapters. Chapter one is entitled “principles and development of Islamic finance”. Here, these authors educate that Islamic finance is a rapidly-growing part of the financial sector in the world. They add that indeed, it is not restricted to Islamic countries and is spreading wherever there is a sizable Muslim community. They disclose that more recently, it has caught the attention of conventional financial markets as well.

Greuning and Iqbal reveal that according to estimates, more than 250 financial institutions in over 45 countries practise some form of Islamic finance, and the industry has been growing at a rate of more than 15 per cent annually for the past five years. The market’s current annual turnover is estimated to be $350 billion, compared with a mere $5 billion in 1985, add these authors.

Greuning and Iqbal stress that whereas the emergence of Islamic banks in global markets is a significant development, it is dwarfed by enormous changes taking place in the conventional banking industry. These authors educate that rapid innovations in financial markets and internationalisation of financial flows have changed the face of conventional banking almost beyond recognition.

In Greuning and Iqbal’s words, “Rapid developments in conventional banking have also influenced the reshaping of Islamic banks and financial institutions. There is a growing realisation among Islamic financial institutions that sustainable growth requires the development of a comprehensive risk management framework geared to their particular situation and requirements.” These authors add that at the same time, policy makers and regulators are taking serious steps to design an efficient corporate governance structure as well as a sound regulatory and supervisory framework to support development of a financial system conducive to Islamic principles.

Chapter two is based on the subject matter of the theory and practice of Islamic financial intermediation. Here, Greuning and Iqbal say financial systems are crucial for the efficient allocation of resources in a modern economy. They add that the landscape of financial systems is determined by the nature of financial intermediation, that is, how the function of intermediation is performed and who intermediates between suppliers and users of the funds.

According to these financial experts, financial intermediation in Islamic history has an established historical record and has made significant contributions to economic development over time. They expatiate that Shariah provides some intermediation contracts that facilitate an efficient and transparent execution and financing of economic activities. These contracts are comprehensive enough to provide a wide range of typical intermediation services such as asset transformation, a payment system, custodial services and risk management, explain Greuning and Iqbal.

They submit that for Islamic financial institutions, the nature of financial intermediation is different from that of conventional financial institutions. In the words of these authors, “A typical Islamic bank performs the functions of financial intermediation by screening profitable projects and monitoring the performance of projects on behalf of the investors who deposit their funds with the bank.”

In chapters three and four, they discuss the concepts of partnership in corporate governance and key stakeholders.

Part two is eclectically christened “risk management”, and covers six chapters, that is, chapters five to 10. Chapter five is thematically tagged “framework for risk analysis”. Greuning and Iqbal here say the goal of financial management is to maximise the value of a bank, as defined by its profitability and risk level. They add that financial management comprises risk management; a treasury function; financial planning and budgeting; accounting and information systems; and internal controls.

In chapters six to ten, Greuning and Iqbal beam their analytical searchlight on concepts such as balance sheet structure; income statement structure; credit risk management; ALM, liquidity and market risks; and operational and Islamic banking risks.

Part three has the summary subject matter of “governance and regulation”, and covers four chapters, that is, chapters 11 to 14. Chapter 11 is entitled “governance issues in Islamic banks”. Here, these financial experts assert that the corporate governance arrangements of Islamic banks are modelled along the lines of a conventional shareholder corporation.

They add that however, Islamic finance raises unique challenges for corporate governance. According to these authors, the first revolves around the need to reassure stakeholders that the Islamic bank’s financial activities comply fully with the precepts of Islamic jurisprudence. Greuning and Iqbal add that the second revolves around the stakeholders’ need to be comforted in their belief that Islamic banks will promote their financial interests, proving to be efficient, stable, and trustworthy providers of financial services.

In chapters 12 to 14, they analytically X-ray concepts such as transparency and data quality; capital adequacy and Basel II; and relationship between risk analysis and bank supervision.

Part four, the last part is conceptually woven together as “future challenges”, and covers one chapter, that is, chapter fifteen also entitled “future challenges”.

As regards style, this text is an embodiment of success. For instance, to enhance readers’ understanding, Greuning and Iqbal include “Key Messages” section in every chapter where the main points are highlighted. These authors generously use graphics to achieve effective visual communication reinforcement. The language of the text is highly literate and financially technical because of the subject matter, yet it is contextually understandable. What’s more, the text is very deep in contents.

However, some errors are noticed in it. One is the error of structural redundancy: “He holds doctorate degrees….” (page xxi) instead of “He holds doctoral degrees….” or “He holds doctorates….” “Doctorate” is a noun and means “A university degree of the highest level”; while “Doctoral” is the adjective and can be used with “Degree”. “Longman Dictionary of Contemporary English” 2005 edition, page 460 illustration says, “She received her doctorate in history in 1998.”

Another error in the book is “…some new presentations and a perspective that offers…” (page xv) instead of putting a comma immediately before “And”, a coordinating junction of adding, to terminate the nominal plurality effect of the word “Presentations”, so that the third person singular (pro)noun verb “Offers”, can operate exclusively with “A perspective” thus: “…some new presentations, and a perspective that offers….”

Generally, the text is an eye-opener. It is highly recommended to regulators and operators in the financial services industry, especially those in the banking sub-sector. It is a reservoir of rare banking knowledge.

A Credit Card Glossary of Terms

The Credit card industry comes with a lot of jargon. You can’t be expected to recognise all the technical phrases employed and some of them could be very important. Listed below you will find a quick description of the most common credit card industry related terms and phrases.

Affinity card

A credit card that makes a donation to a charity of your choice based up on how much you spend. In most cases it’s best to avoid a charity that encourages you to sign up for such a card. Chances are such a credit card has a higher interest rate than the standard. Don’t let guilt cloud your judgement.

APR (Annual Percentage Rate)

calculated yearly this is your overall interest rate presented as a percentage of your credit card balance.

ATM (Automated Teller Machine)

A cash machine. Utilized to withdraw money direct from your credit card, although in general a fee will also be charged.

Balance transfer

When you transfer your debt ‘balance’ from one credit card to another. The usual reason for this is to try and keep as much debt as possible on a lower-interest card.

Credit limit

Your credit limit is the maximum amount you can spend or withdraw on your credit card. Spending beyond your credit limit will result in your card no longer being accepted, and you being charged an over-limit fee.

Fixed rate

A fixed rate credit card is one which indicates that you are given a fixed rate on sign up which should stay the same for the period you have the credit card. In practice though interest rates can be changed for almost any reason.

Grace period

The grace period is the amount of time between your spending with the credit card and the time when you start paying interest on that spending. The best credit cards can have a grace period of up to two months, poorer cards may not have one at all.

Minimum payment

The minimum payment is the lowest amount you can pay back to the credit card company each month. You always try to pay more although this is not necessary. Paying only the minimum amount you are not paying back the money borrowed but only the interest. Minimum payments are usually around 2% of your balance.


A phrase used in the finance industry to describe customers who are a bad credit risk, but are considered worth lending to as the bad credit risk allows the finance company to charge higher fees.

Teaser rate

A ‘special offer’ low rate. You will see many offers with “LOW 4.9% APR” in the headline followed by “for first six months, 21.9% thereafter” in the small print. Teaser offers can sometimes be worth taking, but not if they tie you in for longer than the period of the offer.

Variable rate

An interest rate that is calculated by adding a figure to the current base rate. Taking this option will allow your credit card to be affected by changes in national interest rates – a good idea if you think they might go down, and a bad one if they’re on the way up.