Credit Scoring to Become More “Unified”? Yes, and No
At first glance, this looks like one of those “It’s About Time” things, but hold on.
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Credit bureaus are adopting a new scoring system (HT S.O.B. Alliance member Made 4 The Internet, who forgot that it’s against the rules for him to find this stuff before I do; bolds are mine):
The announcement by Equifax, Experian and TransUnion said the new “VantageScore” was “a direct result of market demand for a more consistent and objective approach to credit scoring.”
The agencies in the past each provided their own scores, meaning that a lender dealing with a consumer’s application for a credit card or a mortgage might have to reconcile three different scores. The scores are important because they measure how much debt a consumer is carrying and how well the consumer keeps up with bills.
The higher the score, the more creditworthy the consumer is considered and the lower the interest rate the consumer is likely to be charged.
The three credit agencies termed the move to a unified score as “unprecedented.”
In its joint announcement, the agencies said: “Under the new scoring system, credit score variance between credit reporting companies will be attributed to data differences within each of the three consumer credit files and not to the structure of the scoring model or data interpretation.”
It added that VantageScore “will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply.”
The scores will range from 501 to 990. The top end is slightly higher than scores currently in use.
This is obviously an attempt by the bureaus to do an end-run around Fair Isaac, which has come to dominate the credit scoring business with its FICO score, and which has been extracting a great deal of lucre from the bureaus over the years by providing those scores. You can be sure that the bureaus have been bristling at the dominance Fair Isaac has achieved.
But, Fair Isaac, whose stock dropped 6.6% on Tuesday, makes a potentially valid point in pooh-poohing the bureaus’ announcement — that the vast majority of lenders use the FICO score:
To be useful to consumers, a credit score has to match the score at which lenders are looking. After all, if you’re looking at a 750 score but your lender sees 650, you’re in for a surprise — either a higher-than-expected interest rate, or a denial of credit altogether.
Right now, plenty of the scores pitched to consumers are not the same as the scores lenders use. Lenders don’t buy some of the scores aimed at consumers, or use their own internal scoring system to generate a unique score.
Until now, the FICO score has been the one score that’s both available to consumers and highly likely to be used by lenders.
Of course, the bureaus want to fix that “problem” too:
But if lenders embrace the VantageScore, that situation could change.
Each of the three credit-reporting firms says they’ve just started rolling out their new product to lenders. Once credit-granting companies are on board, then they’ll start selling VantageScore to consumers, the companies said.
After lenders have a chance to test and adopt the new risk model, “then you have relevancy for the consumers, so this number means something in the credit process,” said Paul Springman, chief marketing officer with Equifax.
For its part, Experian says lenders will soon jump on board with the VantageScore.
Unfortunately, it looks like all of this is going to add an extra step to the process of prudently obtaining credit. It used to be that you could get your FICO score(s) in advance for $10-$35 (cheaper if you shopped a little), and pretty much know how things would turn out when actually applying for credit. It doesn’t seem to make sense to get two sets of scores, FICO and VantageScore, and spend anywhere from $20 to probably $60-$80 before you even apply. For the moment, unless you really don’t care about spending the extra money for two sets of scores ahead of time, the best advice to consumers while this sorts itself out (and that may never happen) is to ask the credit provider you are considering which scoring system they will use when evaluating your application for credit. They’d better tell you; if they don’t, I’d go somewhere that will. If you have any concerns about approval, get that score (either VantageScore or FICO) before you apply. If it’s clear, after getting the score and reviewing your underlying detailed credit history for errors (many credit files still have quite a few), that you need to improve your financial situation first, DON’T apply.
I hope the bureaus, Fair Isaac, and the lenders don’t make things too confusing, because if they do, they’ll find regulators wanting to join the party.
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UPDATE: A possibly good effect of what the bureaus are doing may be that, because of the competition, the prices to get those credit scores may come down to the point where it doesn’t cost that much to get two full sets.
A couple of points:
“The agencies in the past each provided their own scores, meaning that a lender dealing with a consumer’s application for a credit card or a mortgage might have to reconcile three different scores. ”
This makes it sound like there was actual work done to reconcile scores. IF a lender uses more than one of the three, it uses all three and takes the middle number. Our experience suggests that few lenders rely on just one report anymore.
“In its joint announcement, the agencies said: “Under the new scoring system, credit score variance between credit reporting companies will be attributed to data differences within each of the three consumer credit files and not to the structure of the scoring model or data interpretation.”
There has always been slight “data differences” between the files and each agency had its own way of determining a score, to SAY that future variances will be attributed to data differences is the same as saying waves on a lake will be attributed to wind…
When every lender relied on their own determination of credit-worthiness, the lending industry had little sway in the marketplace. When every lender began relying on just three sources for a determination of credit-worthiness, industry power became concentrated in those three sources. What happens when ONE source determines the credit-worthiness of every American…we call that a monopoly right?
Comment by Tracy — March 15, 2006 @ 12:08 am
#1, I believe the bureaus wanted to say that differences will ONLY be due to underlying data differences, i.e., it’s impossible for there to be any other difference.
Your point is valid if that had also been true with FICO. I’m not absolutely convinced that all three bureaus used exactly the same FICO algorithm, and if they didn’t, there could be reasons for score differences other than those relating to differences in the underlying data.
I’ve had thoughts about monopolistic practices as well. What does it matter what bureau the lender uses if the result (assuming the data is the same) is the same from all three? Why even have three? Prediction: merging down to 2 or even one would “make sense” for the businesses.
Then, throw in the consolidation in the banking biz, and everybody developing exactly the same criteria for approving and not approving loans, and it almost looks like one big bank to a consumer (obviously exaggerating).
And if the bureaus ever managed to put Fair Isaac out of business or marginalizing it, which I see as a distinct possibility, I think there would be a SERIOUS, bordering on slam-dunk, antitrust problem with VantageScore.
Comment by TBlumer — March 15, 2006 @ 12:20 am
Thanks for pointing to Fair Isaac’s response; I couldn’t find it anywhere (your link-fu is strong!). In the past, I’ve blogged about how Equifax shouldn’t even be in the credit reporting business. It bothers me a bit that the shoddy Equifax score might now have an effect on my more accurate Experian score. I think having less consistent scoring was something of an advantage from a competitive standpoint.
I’m with you guys on the monopoly/antitrust aspect; if the bureaus succeed in taking out Fair Isaac, they’re going to hear from a lot of politically ambitious Attorneys General.
As for averaging the three scores, mortgage lenders have been doing this, but for credit cards and the like it seems more like a three-chamber Russian roulette; when creditors have pulled my Equifax report (riddled with errors and still containing items from 1995) I got denied. When they pull Experian or Transunion, I’ve been approved. So will the new “more consistent” score be good for me or bad? I guess I’ll have to wait and see.
Comment by Jeff — March 15, 2006 @ 11:38 am
#3, thanks, I wonder if you agree with the recommendation in the last big paragraph in the post.
As the errors, I thought they got ignored after 10 years no matter what, though I guess yours would have been right on the line if you put in the apps last year.
Comment by TBlumer — March 15, 2006 @ 11:45 am