VantageScore turns 10: What it is, why it matters
By Jeremy M. Simon and Kelly Dilworth
Ten years have passed since VantageScore was launched, billed as a more consumer-friendly alternative to the monolithic FICO credit score.
In that time, the score has come into its own, gaining wide use, but hasn’t shaken off the shadow of its older, larger competitor.
VantageScore was jointly introduced by the credit bureaus Equifax, Experian and TransUnion in March 2006. Like the FICO, VantageScore is at its core a complicated formla that takes information about a consumer’s payment behavior and crunches it into a single, three-digit number. Credit scores tell lenders how risky a borrower you are, and are a key factor – sometimes the only factor – in their decisions on whether to lend, and at what rate. The higher the number, the better the deal is for a consumer.
The newer scoring model also incorporates nontraditional information, such as rental and utility payments when available, and takes a less-severe view of certain types of payment behavior. For example, it ignores collection accounts that borrowers have paid off and it forgives late payments resulting from a natural disaster. It also scores a larger number of people by taking into account more recent credit information and generates scores even when a borrower hasn’t used credit in more than a year.
“VantageScore hasn’t gone away. It has continued to make inroads in some portion of the industry,” says Craig Focardi, a principal executive adviser with information services firm CEB TowerGroup.
Still, 10 years after its arrival, no one is arguing that VantageScore has shaken FICO from the industry’s top spot. FICO’s scoring model is still unquestionably the most-common scoring tool used by U.S. lenders when deciding whether to loan money and at what interest rate. And critics say that as long as that remains true, consumers who want the most meaningful measure of their creditworthiness should opt for a FICO score over a VantageScore or any other score on the market.
Similar, but different
Credit scores are not all created equal. VantageScore and FICO’s scoring formulas vary, especially when it comes to scoring consumers with little or no credit history.
VantageScore sets itself apart by giving new borrowers credit for recent accounts, including accounts that have been opened less than six months ago.
“We score as soon as somebody starts using credit, so that picks up new immigrants and kids coming out of college," says VantageScore President and CEO Barrett Burns.
Unlike other credit scores, VantageScore also calculates scores for people who haven’t used credit for up to two years. FICO, by contrast, won’t generate a score if a consumer hasn’t used credit in more than six months, nor will it compute a score if the oldest known account is less than six months old.
Consumers can benefit from using either score. They just need to make sure they know the scaling of the score they’re using.
The latest version of VantageScore, VantageScore 3.0, primarily considers overall payment history – which is the most influential factor when generating a score – as well as the age of each account, type of credit used and the percentage of a borrower’s total credit limit that’s been used. The amount of debt owed by borrowers is also considered to be “moderately influential” while available credit and recent credit behaviors are considered to be “less influential.”
FICO, by contrast, places a greater emphasis on amounts owed, which typically makes up around 30 percent of FICO’s formula. Meanwhile, payment history generally makes up 35 percent of FICO’s formula. Length of credit history makes up about 15 percent, while credit mix – the various types of loans a consumer holds – and new credit both make up about 10 percent of FICO’s formula.
Unlike FICO’s older models, VantageScore’s model also considers utility and rental payments provided they appear on the borrower’s credit history – possibly helping people with little to no credit bulk up their reports.
Some of the nontraditional data VantageScore considers has only recently begun to be collected, however. In 2011, Experian became the first major bureau to include residential rental payment data into its credit reports. TransUnion began accepting rental payments in 2014. Meanwhile, Equifax didn’t start accepting rental payments until early 2016. Most landlords still do not report rental history to credit bureaus, so the amount of available data is limited. Many utility companies don’t report payment history regularly, either, so consumers with thin credit files may be out of luck if the companies they do business with don’t report to the bureaus.
FICO – which doesn’t include such information in its older models, but does consider a variety of alternative data in its new FICO score XD – says it remains uncertain whether that data is useful for determining risk. “Only time will tell whether the quality of the data will be consistent enough to be included in scoring models,” says retired FICO spokesman Craig Watts.
Consumer advocates have their own concerns about the use of alternative data. Wu says including information from utility companies, for example, could actually end up hurting some thin-file borrowers, since those are the consumers who typically struggle to make on-time payments. “There will be a lot of low-income consumers who will end up with black marks on their credit reports,” she says.
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“I’m not as quick to say it’ an unadulterated good,” Wu says.
Slowly making progress
Of course, most banks don’t use VantageScore, instead relying in the FICO scoring model. How dominant is FICO? The company – which is not owned by the bureaus, but supplies them with its model – says that 90 of the 100 largest U.S. financial services institutions use its scores. FICO also claims its score is used in more than 90 percent of U.S. consumer credit lending decisions and that more than 100 billion FICO scores have been used by lenders to make credit decisions since FICO began calculating scores in 1956.
VantageScore, by comparison, says that seven out of 10 of the largest U.S. banks currently use VantageScore – up from six of the largest U.S. banks in 2014. But because the scores are sold by the credit bureaus – not through VantageScore – the company says it isn’t aware of the latest market share information. According to its most recent survey of the three largest credit bureaus, though, more than 6 billion VantageScores were pulled between July 2014 and July 2015 -- double the amount of scores that were used the year before.
VantageScore says the market for VantageScores is expanding rapidly, thanks in part to the proliferation of free credit score services that give away VantageScores instead of FICO scores.
But experts say further growth in lending could be slow, as it’s costly for lenders to switch scoring models. FICO has also begun competing with VantageScore’s ability to score cardholders with little or no credit history by introducing a new credit score that also incorporates nontraditional data. All of this means is the next time you apply for a credit card, mortgage or car loan, it’s highly likely that your lender will use a FICO score to help judge your riskiness.
Grading your credit
Still, experts say VantageScore offers another way for consumers to educate themselves about credit and that’s a good thing.
Since credit card companies began offering free credit scores to cardholders in 2013, free credit scores have multiplied in the marketplace and VantageScore has capitalized on the trend. A number of banks now offer credit card holders free VantageScores, including Capital One and USAA. Discover, by contrast, is the only company that offers free FICO scores to non-credit card holders.
VantageScore has also become a leader in the market for free credit scores that aren’t provided by a credit card company. For example, VantageScore currently lists nine personal finance websites that provide free VantageScores to web users, including CreditCards.com, Bankrate.com and ReadyForZero.
As VantageScore gains a stronger foothold in the market, it appears the credit scoring model is here to stay, experts say.
Despite the advantage FICO holds in the marketplace, VantageScore remains confident about its present, as well as the next 10 years. “We are a major player now,” says Burns.
Updated: July 6, 2016
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