The big three major consumer credit bureaus in the United States have created a new credit scoring system designed to make it easier for financial institutions to evaluate loan applications and give consumers a better measure of their financial standing.
Equifax, Experian and TransUnion announced they are introducing a new system called VantageScore to banks, mortgage lenders and credit card companies. The new credit scores will be available to consumers after the lender rollout sometime later this year.
This will be a consistent scoring model that works across all three reporting agencies with the new VantageScore system. This consistent score will be more helpful to consumers.
How the traditional scoring works
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 have been at paying back loans and how many credit applications are outstanding.
Credit scores are important in the lenders decision of loaning 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.
In the past, the credit reporting agencies used their own formulas to generate their scores, meaning that a lender dealing with a consumer’s application for a credit card or a home loan might have to make a decision on three widely different scores.
With the new scoring system, a single methodology will be used to create the scores for all three credit bureaus. Credit scores will be virtually the same across all three of the national credit reporting companies. If there is a difference then that will be reflected in the data collected in the files of their consumers.
The credit reporting agencies claim that VantageScore will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply. VantageScore is a new product to give lenders greater choice and greater accuracy in credit scoring.
VantageScore ratings will range from 501 to 990. The top end seems slightly higher than scores currently in use. Experian said the new scores will be grouped on the familiar academic scale you see in our school system. Experian gave these groupings, with A and B being the best potential borrowers and D and F being the worst:
A — 901-990
B — 801-900
C — 701-800
D — 601-700
F — 501-600
A spokeswoman for TransUnion, told 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. Equifax representatives 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. They also went on to say the score would reflect a consumer’s frequency of borrowing, delinquency in paying bills and other content in peoples files.
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. VantageScore is jointly owned by the three credit bureaus of Equifax, TransUnion, and Experian. The website can be found at vantagescore.com.
VantageScore and beyond
Consumer advocacy groups are concerned that the new scoring system would not eliminate one of the biggest problems in the industry which is incorrect information in consumers’ credit files. They claim that it’s a new recipe but with the same old ingredients. The consumer groups are concerned about the accuracy of the credit reports on which the scores are based.
There are many large lenders who generate their own internal scores relying on credit bureau data. There are also many lenders in the mortgage business that use FICO scores. FICO scores are named for the Fair, Isaac Corp. that developed the scoring. FICO claims that they will continue to cooperate and compete with the credit bureaus. A representative from FICO also said that consumers may not want to go through the pain of converting to another system.
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