Will New Credit Scoring Alliance Produce Results, or Confusion?
Will
New Credit Scoring Alliance Produce Results, or Confusion?
On Tuesday, the three major credit reporting agencies–Equifax,
Experian and TransUnion–announced their alliance in creating
a new credit scoring system called VantageScore.
While the agencies promise it will benefit consumers by providing
greater consistency, it is possible that it will actually increase
consumer confusion.
Does VantageScore solve a problem, create a problem, or both?
While having the major credit reporting agencies align around
a standard sounds ideal, what they’ve created is a competing
standard to what currently exists. Do competing credit scoring
systems help consumers? Is there potential for a split lending
market, with half the financial institutions consulting one
type of report and the other half consulting a different report?
Currently the major credit reporting agencies calculate credit
scores through a system devised by Fair Isaac Corporation, and
the result is known as a FICO score. Although each agency uses
the same basic system, the consumer data each collects, along
with slight variances in the formulas used, cause credit scores
to vary across the agencies. This can cause confusion for consumers
who want to know their FICO score, only to find they actually
have multiple FICO scores.
While the VantageScore system promises to iron out the differences
and provide a more consistent score, it is not a replacement
for FICO scoring, which will still be available through Fair
Isaac. The “scoring scale” is different between FICO and VantageScore–for
example, a 760 FICO score indicates good credit, while a 760
VantageScore earns a “C”, indicating average credit. Financial
institutions will have to choose between these competing standards,
and consumers will have to keep them straight.
Many
consumers track their credit scores, especially those who are
attempting to rebound from a bad credit history. Will they be
left wondering which credit score is more trustworthy? Or wondering
which is the “right” score for their particular financial
institution? While in one sense the move by the credit reporting
agencies should be applauded, consumers may end up wishing they
had collaborated to fix what was broken instead of starting
from scratch.
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