If anything good has come from the epidemic of identity theft that has plagued
so many in recent years, it might be that American consumers have finally caught
on to an important truth; credit counts. And, as a result, they have learned
how important it is to monitor their credit reports and their
credit scores.
Government agencies and consumer groups have been vocal and effective in drilling
this lesson home, aided by passage of the Fair and Accurate Credit Transactions
Act which, last year, made it mandatory for the three major credit reporting
agencies to each provide one
free credit report each year to any vigilant consumer who requests one.
Credit scores, generally called FICO Scores (the company which
provides the formula and software for determining this benchmark is Fair, Issac
Corporation) are not included in the Congressional mandate for free reports
but FICO sells its scores and the three credit bureaus provide their own versions
for a nominal fee.
Three years ago most Americans didn't even know they had a credit score,
even though banks, loan companies, and especially mortgage lenders had used
credit scoring for a number of years to measure the creditworthiness of their
borrowers. But today even television commercials tout the value of a high score
(like the guy whose entire life is haunted by the number 619) and the term is
tossed around with great familiarity by everyone contemplating new indebtedness.
FICO scores are widely used by mortgage lenders, but the three credit bureaus,
TransUnion, Experian, and Equifax, have utilized
and marketed their own credit scores from their proprietary databases although
their models were based on FICO's.. Thus a borrower will often find that they
have three or four scores that can be quite distinct. In this writer's case
there was about a 60 point deviation from low score to high when I refinanced
last year. Further, large lenders frequently use credit bureau information or
FICO scores to tailor yet another set of mathematical measurements to suit their
own purposes. Still, it is the FICO score that most of us remember.
So, now that we are comfortable with what constitutes a score, what our own
scores are, and how that indicates that we stack up, it is all going to change.
On March 14 the three bureaus announced that they have collaborated on a new
credit scoring system "to benefit consumers and credit grantors." The
new system named VantageScore is, according to Equifax, "a
direct result of market demand for a more consistent and objective approach
to credit scoring methodology across all three national credit reporting companies."
The new system will probably still result in variations from credit bureau
to credit bureau, but such variance "will be attributed to data differences
within each of the consumer credit files and not to the structure of the scoring
model or data interpretation." David Rubinger, speaking for Equifax, said
that the new score was expected to reduce the variance by about 30 percent from
what it was under the previous model.
The three bureaus have formed a new entity, VantageScore Solutions, LLC, but
will each continue to market and sell scores separately through a licensing
agreement with VantageScore.
VantageScore will use a larger range of scores than FICO which calculates its
score in a range from approximately 300 to 850 although we suppose it is possible
to have such a bad credit history that the 300 floor could cease to exist. These
scores were based largely (a total of 65 percent) on payment history and total
indebtedness with lesser weight given to length of credit history, amount of
recent credit, and the types of debt.
In an example from FICO's website, a top score could save a borrower
over 15 basis points on a typical loan over a rate which would be available
so a borrower with a score in the low 600s. Presumably any borrower with even
a lower score would have to deal with lenders outside of, shall we say, the
normal sphere of the banking industry.
The new VantageScore will range from 500 to 990. VantageScore will also group
scores into alphabetic categories covering a 100 point range that will return
lenders to a more refined version of the old A, B, C credit rankings. Thus,
from 501 to 600 points the borrower will be branded as having "F"
credit while at 901 plus the grade will be an A. There is at this point no indication
of what the national distribution will be - under FICO the median score
is 723 - nor where borrowers' potential interest rates will fall
along the spectrum. The bureaus declined to reveal how various inputs such as
delinquency or amount of debt would be weighted on the scale.
According to news reports, some consumer protection agencies expressed concern
that the new system did nothing to address the underlying problem of errors
within the data bases upon which the scores will be based.
The new scores will be available to lenders immediately and to consumers later
this year.