Credit Bureaus Join To Remake Scoring

Credit Bureaus Join To Remake ScoringSystem Employs Letters, New Scale

By Caroline E. MayerWashington Post Staff WriterWednesday, March 15, 2006; D01
The nation's three largest credit bureaus yesterday unveiled a new credit scoring system that they say will make it easier for lenders to determine a borrower's credit risk and for consumers to more accurately gauge their financial health.

In a rare cooperative venture, Equifax Inc., Experian Information Solutions Inc. and TransUnion LLC designed the new system, called VantageScore, to simplify the credit-application process by providing an easy-to-understand, consistent score among the three firms. They say the score will better predict whether a consumer will make timely payments over the life of a loan.

However, the three credit bureaus released so few details about VantageScore that industry officials and consumer activists said that the credit-application process could become more confusing for consumers, certainly in the short-term and possibly longer.

VantageScore will compete with FICO, the scoring system created by Fair Isaac Corp. and used in about 75 percent of all mortgage applications. It will use a different set of calculations to produce scores, ranging from 501 to 990; the FICO scale goes from 300 to 850.

Although the credit bureaus are starting to sell VantageScore to lenders, the new scores won't be available to consumers for at least several weeks. Consumers can continue getting the individual credit-bureau scores as well as FICO scores. The latter vary widely among the credit bureaus, a common complaint that led to the creation of VantageScore.

The new scoring system will not be valuable to consumers "unless the credit grantor adopts and uses it," said Paul J. Springman, chief marketing officer for Equifax. He said his firm would switch as soon as lenders accept the new system. "That will take more than six months," he said.

Experian said it hoped to offer the new score to consumers within eight weeks, while TransUnion said it would do so later this year.

Virtually no loan is granted today without a credit score -- a three-digit number based on payment history, outstanding debt, and the number and type of accounts. Lenders say these scores treat applicants more objectively and speed up the approval process, which is critical in today's credit-based economy.

The higher the score, the better the credit risk -- and the lower the interest rate to be charged. For FICO, most people score in the 600s and 700s, and anything above 700 is considered very good financial health. Under VantageScore, anything above 900 is considered an A; from 800 to 900 is a B and so on.

The different scoring scale might confuse consumers, who are still getting used to the FICO system, said Stephen Brobeck, executive director of the Consumer Federation of America. "This is complicated enough without a second scale," he said.

The credit bureaus said they developed VantageScore after lenders requested a more accurate system, one in which scores did not vary widely among credit bureaus. The score will be independently marketed and sold by each bureau through licensing agreements with VantageScore Solutions LLC, which is jointly owned by the three companies.

Although the new mathematical formula used to come up with the score is intended to reduce the variation, there will still be differences because each company collects data differently. Since some accounts may be listed at one bureau but not the other, a consumer may still get different scores from each firm.

"It doesn't address the larger issue of how accurate are the files," said Gail Hillebrand, a senior attorney with Consumers Union.

VantageScore represents an attempt by the credit bureaus "to develop a better mousetrap, to put more money in their pocket and prevent more from going out of it," to rival FICO, said Greg McBride, senior financial analyst for Bankrate Inc., whose Web site Bankrate.com aggregates financial rate information.

Ron Totaro, vice president of Fair Isaac's Global Scoring Solutions said the 17-year-old FICO score is "pretty ingrained and encoded in computer systems" of lenders, which will make it hard for financial institutions to switch. "It's very difficult to come up with a better mousetrap," he added.

Douglas G. Duncan, chief economist for the Mortgage Bankers Association, said VantageScore's success will depend on accuracy, price and product efficiency.

McBride said that with the dueling systems, banks will become much "like high school seniors deciding which college-entrance exam to take, the ACT or SAT."

© 2006 The Washington Post Company