What’s the Score?
On March 15, the three major credit reporting companies (Experian, Transunion, and Equifax) got together and announced VantageScore, a new model for credit scoring. There are several questions raised by this new scoring method, the biggest being what advantage does this new scoring mechanism have for both businesses and consumers to make them use it over the well established FICO score? Also, what was wrong with FICO causing the the credit reporting companies to come up with their own scoring model?
About VantageScore
According to their website, “VantageScore is an innovative score that simplifies and enhances the credit process for both consumers and credit grantors. It’s the first credit scoring model to be developed jointly by the national credit reporting companies. As a result, it leverages the collective expertise of the industry’s leading specialists in credit data, credit risk modeling and analytics to offer greater predictiveness and consistency.” In layman’s terms, it’s a credit score, not to be confused with your credit report, which you can get for free annually. FICO scores, available from myfico.com, will run you $14.95 for a score from one of the bureaus, and $44.85 for scores from all three bureaus. Purchasing your score will also come with credit reports from the agency (or agencies) you purchased the score from.
The new credit score uses a new numbering system, different than the existing FICO score. Instead of your score being somewhere between 550 and 850, with 723 being the median score, you’re score is now between 501 and 990. Along with a numerical score, VantageScore will give a letter grade, similar to high school. The grading system is as follows:
| Range | Grade |
|---|---|
| 901 - 990 | A |
| 801 - 900 | B |
| 701 - 800 | C |
| 601 - 700 | D |
| 501 - 600 | F |
VantageScore and Lenders
Businesses currently pay one (or all) of the three of the U.S. credit reporting bureaus a fee in order to retrieve your FICO score, which is put out by Fair Isaac. In return, the bureaus pay Fair Isaac a royalty for each score they issue. Since the information on each credit report can differ slightly from each other, you can have three different FICO scores. For larger loans, such as mortgages, it’s typical for the lender to pull all three scores. Each lender then has its own criteria on which score it will use (highest, lowest, middle), or if it’ll average all three scores to create a new score. CreditBloggers has a great explanation of this in their own review of VantageScore.
VantageScore is unlikely to change any of this. Each credit bureau will still be issuing the score from their version of your credit report, which will each differ slightly. The credit bureaus claim VantageScore will be more consistent between the three agencies, but it’s more likely the larger scaling of points (FICO’s range is 300 points versus the VantageScore range of 489 points) will actually stretch out scores. However, scores are still likely to fall in the same academic grade within their 100 point range, unless a customer is borderline between the scores, of course.
Another issue is the likelihood businesses are going to be slow to adopt the new scoring mechanism. Financial institutions have never been quick to adopt new systems. The Fair Isaac system works and they have all their lending models already created based on this. There’s no reason or motivation for lenders to switch from using FICO to VantageScore.
VantageScore and Consumers
So now consumers have two scores to worry about. There’s no way for customers to know, when applying for loans, which model the lender is going to use to make their decision. As a result, customers are going to have to pull not only their FICO score (often from all three agencies), but also their VantageScore. Plus, customers are going to have to learn a whole new system. The reporting bureaus state the new system is easy to learn, but why mess with something already doing the job?
Kiplinger explains how when customers purchase scores from any of the three bureaus, they aren’t actually purchasing their FICO score. They are instead purchasing proprietary scores based on models created by each bureau which is something like but not quite a FICO score. The only bureau to provide an actual FICO score is Equifax. If you want your FICO score from the agencies, you have to go directly to Fair Isaac. The VantageScore will replace these differing models and when you purchase direct from the bureaus, you will now receive this score, created with a consistent model from all three agencies. However, this is no longer something not quite like a FICO score, but a completely different score using a totally different model.
Consumer advocates, including the Consumer Union worry this new reporting mechanism will do nothing other than confuse customers. Gail Hillebrand, a senior attorney for Consumers Union in San Francisco spoke to the Sacremento Bee, “It won’t be a big deal for the lenders, but by having two different scoring scales (FICO and VantageScore), consumers won’t know if they are doing well or not.” Ms. Hillebrand adds, “The new system sounds like a lot of hype to me.”
Why They’re Doing It
The main reason for the new VantageScore is money. The three credit bureaus are edging out Fair Isaac in a deliberate attack. There’s no reason to do this other than they now each get to keep full proceeds of any VantageScore report pulled, rather than passing on a royalty to a third party company.
Ron Totaro, vice president of Fair Isaac’s Global Scoring Solutions said the 17-year-old FICO score is “pretty ingrained and encoded in computer systems” of lenders, which will make it hard for financial institutions to switch. “It’s very difficult to come up with a better mousetrap,” he added.
VantageScore will supposedly be available for businesses to begin using in the May - June time period. However, it can take up to six months or more for businesses to start using it for loan purposes. Businesses will have to adjust their computer models and this will take time. So, while VantageScore may be on the horizon, it’s not here yet and its ultimate usefulness has yet to be determined.
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April 3rd, 2006 at 10:57 pm
I think the higher-scoring model will attract a lot of predatory lenders who will try to convince people their scores are actually better than they are. Who wants to go with a lender that thinks their credit is bad?
It’ll be interesting to see how this all plays out.