Friday, June 23, 2006

Credit Bureaus Hope to Displace FICO Score as Industry Standard

June 22, 2006

The Experian credit agency became the first to start selling its new "VantageScore" credit scoring system this week. Critics aren't impressed.

John Ulzheimer of the credit information Web site CreditBloggers said that the hype over the VantageScore was "nothing more than an effort to confuse consumers and unsophisticated lenders."

"I'm not angry at the bureaus for trying to muscle out FICO," Ulzheimer said. "[M]y question is could they have spent their collaborative time together more constructively for consumers?"

The three credit bureaus jointly developed VantageScore as an alternative to the lending score created by the Fair Isaac Company (FICO), which is the standard score used by lenders to judge a borrower's creditworthiness.

For $5.95 a pop, users can buy the Experian VantageScore and see where the new credit system ranks them in terms of attractiveness to lenders. The new VantageScore system grades consumers on a number scale from 501 to 990, with a corresponding letter grade of "F" to "A."
Experian information solutions group president Kerry Williams says the new score "responded to the clear need for an objective scoring model that works across all three reporting companies' data."

Currently, Experian and fellow credit bureau TransUnion offer their own "proprietary" credit scores with the reports borrowers can purchase, but these scores are often wildly divergent from a consumer's real FICO score.

Although the bureaus claim these scores are "educational," they're heavily advertised as being legitimate credit scores that borrowers can use to judge their credit stability. Lenders, however, largely prefer the traditional FICO score, due to its longevity and prominence in the industry.
Equifax, the third of the "Big Three" credit bureaus, has been offering its true FICO scores with its reports. The scoring formula FICO uses has been closely guarded by the company as a trade secret, and the major credit bureaus have to pay Fair Isaac a licensing fee to use it in their credit scoring and reports.

CreditBloggers founder Emily Davidson purchased her VantageScore on June 20th and compared it to her Experian FICO score. According to Davidson, the ordering process was clumsy and counterintuitive, and the score ranking did not include information from her Experian credit report.

"Experian's VantageScore was difficult to interpret and their ordering system was poorly designed," she said. "If the bureaus are serious about competing with FICO, they need to work on making this score the best in the industry for both consumers and businesses."
The new credit score system has been criticized for making the same mistake as the current credit scoring system -- relying on inadequate or inaccurate data reported to the bureaus.
Sloppy record-keeping, mixing of different consumer records, and complex dispute resolution processes mean that even if the three bureaus are sharing the same score, they're still relying on bad data to make their scoring decisions.

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