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Debt Management 2006

Reports and scores

  Understanding credit reports -- their truths and myths -- is crucial to your daily life.
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What's in the formula?
In most respects, VantageScores are calculated along the same lines as FICO scores. The creditworthiness formula takes into account consumers' bill-payment histories and how much debt they are carrying.

Under VantageScore, the factors contributing to a high or low score include:

VantageScores
With VantageScore, the factors contributing to the score include:
32% payment history
23% utilization of available credit
15% credit balances
13% length and depth of credit history
10% recently opened credit accounts
7% available credit
 
FICO scores
For FICO, factors contributing to the score are:
35% payment history
30% amount owed
10% types of credit in use
15% length of credit history
10% new credit
   
   

Credit scores from vary from bureau to bureau due to differences in scoring methods and data.

Because VantageScore is touted as using the same algorithm to calculate scores across all the credit-reporting companies, numbers should vary only if the bureaus have different data on file. Data variances sometimes occur because lenders report credit activity to only one or two bureaus. Credit records often also contain inaccurate information.

Who's using VantageScore?
Today, more than 200 lenders are testing VantageScore as a primary scoring method, says Experian's Oliai, who says he expects lenders will test the three-month-old system for at least six months to a year before using it to make credit-granting decisions.

To date, no lenders have announced that they're switching to VantageScore. Credit bureaus expect that smaller lending institutions will be earlier adopters of the scoring system and that large banks will wait longer and perform wider testing before considering a switch.

While the credit bureaus have not disclosed how much they will charge lenders to use VantageScore, Oliai says the amount is competitive with the cost of tracking credit scores through FICO. Although lenders can implement both FICO and VantageScore, he expects that the vast majority eventually will pick one or the other. Each credit bureau prices and markets VantageScore independently.

FICO also employs scorecards developed to be predictive of consumers with limited credit histories, says Tom Quinn, vice president of scoring for Fair Isaac Corp. In general, Quinn says, the procedures used to determine the risks of lending to "thin-file" consumers are quite similar to those used for evaluating people with lengthy credit histories.

Who benefits from VantageScore?
While VantageScore will be confusing at first, it's unlikely to change much in the way consumers apply for and receive credit, says Matt Fellowes, author of a Brookings Institution study on credit scores and financial mobility.

"It's clear this is a business-driven decision. This isn't a consumer-driven decision," Fellowes says, regarding the credit bureaus' collaboration on VantageScore. "It's clear that FICO has the major market share, and the bureaus have always been hurt that they each have their own scores."

Fair Isaac Corp., the Minneapolis financial-services firm that introduced FICO in 1989, stands to lose the most if VantageScore gains market acceptance. Its stock fell 6 percent the day TransUnion introduced VantageScore. The credit bureaus stand to profit the most if VantageScore succeeds.

For consumers, Fellowes says, VantageScore falls short of addressing a primary concern: mistakes in credit records.

Currently, credit bureaus are not required to publicly report assessments of the accuracy of their information, although they do track such data internally. Fellowes also sees risks associated with using a single creditworthiness formula at all three credit bureaus.

"I'd much rather take the average between three different scoring methodologies than to take the exact same methodology across all three bureaus," he says.

-- Posted: July 1, 2006
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