VantageScore to join FICO in credit score arena

By Jeremy M. Simon

Credit reporting agencies Experian, TransUnion and Equifax have joined together to provide VantageScore, their own version of a credit score. It is designed to provide a single consistent score across all three major credit bureaus. The goal is for lenders to begin using VantageScore as a challenge to the dominant FICO credit score, produced by the Fair Isaac Corporation. Fair Isaac reported $798.7 million in revenue in 2005.

The creation of VantageScore is not the first time the credit agencies have attempted to take Fair Isaac’s business with their own proprietary credit scores. However, previous products were not widely adopted by lenders because each agency used a different scoring system with different score ratings, which made it hard for lenders to manage risk. It was not unusual to see discrepancies of 100 points or more, which could mean the difference between an 8.13 percent mortgage and a 6.76 percent mortgage.

The credit reporting agencies joined together in March 2005 and buried their rivalries long enough to create VantageScore. VantageScore was introduced in March 2006, but until recently was available only to businesses and lenders. Now consumers can purchase a copy of their VantageScore from Experian for $5.95.

The agencies said the new system improves risk prediction by weighing more factors, as well as more accurately measuring consumers with short credit histories, or "thin files." Additionally, VantageScore takes into consideration the changing style of borrowing, such as the way Americans use their home as a bank by taking out home equity loans.

One of the benefits of VantageScore for consumers is its clarity. The agencies assign a letter grade to a group of three-digit scores, making it easier to understand. A score of 901 to 990 is an "A," 801 to 900 is a "B," 701 to 800 is a "C," 601 to 700 is a "D," and 501 to 600 is an "F."

Although the agencies acknowledge that the use of the three digits is confusing, they said it was necessary because if lenders are going to adopt their system, the lenders would want to maintain the same software that has three spaces for a credit score.

Despite the attempted challenge to FICO, most lenders will not be using VantageScore for at least six months, and possibly up to 18 months. Each lender will need to test the scoring system in order to determine how successful it is at measuring credit risk and how it compares with a next-generation FICO score that Fair Isaac has developed to compete against it.

Fair Isaac has pointed out that FICO and VantageScore systems assign different weights to various factors of consumer credit to arrive at a score, a potential problem. It is possible, although a consumer will never know for sure, that some behavior might improve one score, but hurt another.

Still, the discrepancies are unlikely to occur often because Fair Isaac and the credit agencies agree on the primary things that make a good borrower, including paying bills on time, having a lengthy credit history, and not overusing your credit.

Published: June 3, 2006

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