The nation’s three major consumer credit bureaus have created a new credit scoring system designed to make it easier for financial institutions to evaluate loan applications and to give consumers a better way of measuring their financial health.
The credit reporting agencies — Equifax, Experian and TransUnion — announced Tuesday that they’re introducing “VantageScore” to banks, mortgage lenders and credit card companies immediately. The new scores will be available to consumers after the lender rollout, probably later this year.
“There’s clearly been a need out there to have a consistent scoring model that works across all three reporting agencies’ data,” said Kerry Williams, group president of Experian’s credit services division. “And consumers need a consistent score that they can understand and use in their own financial lives.”
Credit scores traditionally have been three-digit numbers that lenders used to evaluate the creditworthiness of borrowers. The scores reflect how much debt a consumer is carrying, how good they’ve been at paying back loans and how many credit applications they have outstanding.
They’re important because lenders use them to determine if they’ll loan money to consumers and at what rate. The higher the score, the more creditworthy the consumer is considered and the lower the interest rate the consumer will be charged.
The agencies in the past each used their own proprietary formulas to generate 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 widely different scores.
With the new system, a single methodology will be used to create the scores for all three credit bureaus, the agencies said.
As a result, scores will be “virtually the same across all three of the national credit reporting companies,” said Experian spokesman Donald Girard. Any difference in the scores provided by each agency will reflect differences in the data they’ve collected in consumers’ files, he said.
The credit reporting agencies said in their announcement that VantageScore “will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply.”
Consumer advocacy groups expressed concern that the new scoring system would not eliminate one of the biggest problems in the industry which is incorrect information in consumers’ credit files.
“That means it’s a new recipe, but the same old ingredients,” said Jean Ann Fox, director of consumer protection with the nonprofit Consumer Federation of America in Washington, D.C. “It doesn’t address the underlying accuracy of the credit reports on which the scores are based.”
In addition to the credit agency scores, some large lenders generate their own internal scores, often using credit bureau data. And many lenders, especially those in the mortgage business, use FICO scores, which are named for the Minneapolis-based Fair, Isaac Corp. that developed them.
Thomas G. Grudnowski, the chief executive officer of Fair, Isaac, said that “for the past 20 years, we’ve been both cooperating and competing with the credit bureaus ... and that will continue.” He added that it could take a long time to establish a competing system.
“Do the customers ... really want to go through the pain of converting to another system?” he asked. “I think only time will tell.”
Dana Wiklund, senior vice president for predictive sciences at Equifax, said that VantageScore “is a new, competitive product to give lenders greater choice, and hopefully greater accuracy, in credit scoring.” He added: “The rate of adoption will determine ultimately if the (new) score replaces any in-house or generic scores in the market.”
Executives at the credit agencies said that the bureaus did not need to consult with federal regulators before developing their new scoring process. But a number of executives, including Wiklund, traveled to Washington, D.C., on Monday to brief bank, savings bank and credit union regulators on the new scoring process.
“The role of the regulators is to look at the safety and soundness of the institutions they oversee,” Wiklund said. “They’re very keenly interested so that models don’t have disparate impact ... on low income vs. high income individuals, minority vs. non-minority, that kind of thing.”
VantageScore ratings will range from 501 to 990. The top end is slightly higher than scores currently in use.
In a separate statement, Experian said the new scores will be grouped on “the familiar academic scale.” Experian gave these groupings, with A and B being the best potential borrowers and D and F being the weakest:
- A — 901-990
- B — 801-900
- C — 701-800
- D — 601-700
- F — 501-600
Colleen Tunney, spokeswoman for TransUnion, told a conference call with reporters and credit industry representatives that the new score was created by looking at millions of consumer files at the same time to ensure consistent readings across the three bureaus’ data.
David Rubinger, spokesman for Equifax, said the new score was expected to reduce the variance in a consumer’s scores by about 30 percent compared with what it was under the old system.
He said the score would reflect a consumer’s frequency of borrowing, delinquency in paying bills and other “file content.” But Rubinger and other credit bureau spokesmen said it was too soon to provide the specific weights for the components.
VantageScore is being independently marketed and sold separately through each of the three national credit reporting companies through licensing agreements with VantageScore Solutions LLC, the joint announcement said. The spokesmen said that VantageScore was jointly owned by the three credit bureaus. They said it did not yet have a headquarters, although an informational Web site had been set up at www.vantagescore.com.
The credit reporting agencies are operated by Equifax Inc. of Atlanta, Experian Information Solutions Inc. of Costa Mesa, Calif., and TransUnion LLC of Chicago.