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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