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Credit Bureaus Introduce New Scoring System

By Martin H. Bosworth
ConsumerAffairs.com

March 15, 2006

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Just when it seemed consumers were getting a handle on how credit scores -- those three-digit numbers that can determine your lending rate for cars, credit cards, and mortgages -- were generated, the three major credit bureaus have introduced a new scoring system that shares data from all three agencies.

The new system, "VantageScore," is designed to provide better reports and more accurate data, and covers a more extensive consumer base, including the elusive "thin credit file" for consumers who have little to no credit history.

It's also a direct challenge to the Fair Isaac Corporation's FICO score, which provides the most commonly used credit scoring for mortgage lenders and other agencies.

The FICO score has, until now, been the model for the three bureaus -- Equifax, Experian, and Trans Union -- to directly gauge customer credit worthiness, or to develop their own scores.

With the arrival of the Vantage Score, the major players in the credit industry are claiming that they "will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply."

But some observers say that the new scoring model won't change the biggest problem consumers face when it comes to credit scoring -- inaccurate or incomplete data in their individual reports.

Remaking the Grade

The VantageScore system utilizes data culled from a sampling of millions of credit files reviewed by the three agencies, creating a single consistent score, utilizing "cutting-edge, patent-pending analytic techniques."

According to company press, the new score would provide far less variation than the proprietary scores used by some of the major bureaus.

The FICO score model grades consumers' credit ratings based on factors such as debt-to-income ratio, credit usage and history, bad credit items, and so on.

Whereas the FICO score ranges from 300 to 850, with most Americans scoring between 670 and 700, the new VantageScore goes from 501 to 990, with each score range being grouped by letter. Consumers with scores in the 900 and higher range would be grouped in the "A" range, while those in the 600 and below range would receive a grade of "F."

Borrowers are often frustrated in their attempts to gain new credit, as each bureau utilizes its own proprietary credit score, often wildly differing from one another. Equifax switched to using the FICO score in 2005, but Trans Union and Experian utilize their own scores.

Fair Isaac has been criticized for not disclosing the inner workings of its credit scoring algorithm, citing it as a proprietary business secret.

Although each involved agency would utilize the VantageScore in offering information to lenders, there would still be variances in data from each bureau, owing to the differences in data they collect on consumers.

Michael Nathans, president of "alternative" credit bureau Payment Reporting Builds Credit (PRBC), said that as long as some bureaus report payments from consumers and others don't, there will always be inaccuracies in a consumer's credit report that they will have to correct.

"There is a great deal of information from people who are paying their bills on time, and the credit bureaus don't care enough to track it," he said.

Vantage Point

PRBC and other agencies like it have been challenging traditional credit models by using systems based on utility payments, rental payments, and so on.

The "thin credit file" market can gain access to better rates by using these systems, and they represent a coveted new area of expansion for all the major players in the credit industry.

The major credit bureaus claim that VantageScore will offer "more predictive scoring" on thin-file consumers, but details were scant as to how the new score would elicit more accurate information.

Representatives at Fair Isaac were skeptical that the new score would be immediately adopted for use by lenders and businesses. Fair Isaac vice-president Ron Totaro told USA Today that the new numbering system would cause confusion for people.

A borrower with a FICO credit score of 800 had "excellent credit," he said, but under the new VantageScore system, that would only grant them a letter grade of "C."

PRBC's Nathans joked that the day of the VantageScore announcement, he received many e-mails claiming "the big 3 bureaus were out to kill FICO." Nathans thought Fair Isaac was "prepared" for the competition from VantageScore, and will continue to look for ways to get new data for their own lending scores.

According to the press statement, the VantageScore system was developed by VantageScore Solutions, LLC, an "independent" company created and owned by the three major bureaus. Federal law prohibits the three bureaus from directly sharing data on consumer records.

The 3 major credit agencies had previously agreed to create a "data protection standard" to make sure information transmitted from lenders and other businesses to the bureaus was not tampered with. Critics noted that this move also did not address the question of inaccurate data in the credit reports themselves.

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