What VantageScore Could Mean for Newer or Less-Experienced Borrowers

Credit scores have long been determined by a nearly universal formula known as the FICO model. This model, owned by Fair Isaac, is used by over 80% of the major banks in the US, and is the familiar 300-850 credit ranking that consumers are familiar with.

The credit bureaus have put out their own credit scoring formula to rival the FICO formula. This newer method of scoring is known as VantageScore, and is said by the credit bureaus to be a better assessment of risk, and just as good as FICO's system at stabilizing differing data from the three credit bureaus.

There are two ways in which the bureaus believe that their method is a better risk assessment than FICO's. VantageScore takes a different approach to some borrowers that the bureaus feel pose more of a risk than the FICO model accounts for. These are newer or "younger" borrowers, those with their oldest account open for several months to a year or two, and "lean" borrowers, who have few accounts to gather information from. The bureaus have long complained to Fair Isaac that these borrowers' habits have not been well established enough to warrant even the best of them receiving a top credit score. They claim that their model does a better job assessing the risk of young and lean borrowers. What this may translate to in practice is credit becoming significantly less accessible to these consumers.

The second way in which the bureaus believe VantageScore better assesses risk is in separating good from bad risk. VantageScore has even advertised the importance it places on putting more bad risk accounts, or even possible bad risk accounts, into the very lowest score ranges possible. What this may mean in practice is less concern about a contested mark on an individual's credit report or less tolerance overall of minor infractions, and more individuals being placed into the "bad egg" category, perhaps somewhat hastily. This will remain to be seen once the system has been in place for a measurable amount of time.

Perhaps the true test of the new system's effectiveness will be in its ability to give consistent scores to borrowers regardless of which credit reporting bureau is providing the information. The three credit bureaus, Equifax, TransUnion, and Experian, all accumulate their information independent of one another. There may be accounts that show up on two of the bureau's reports on the same individual, and not on the third company's. There may be a contested charge that two companies agree to remove, while the third refuses. There are different policies and networks in place that acquire the information of consumers. Thus, the challenge and success of FICO has been in their ability to provide a relatively stable credit rating for consumers regardless of which set of information they are getting; to weed through the discrepancies, essentially. If VantageScore is able to do this, it will have a greater chance of being accepted by lenders. The bureaus claim that it does just that, but as of yet, it has not been tested against FICO or in any significant way. This will likely be the test of whether or not VantageScore has the staying power to give FICO a run for its money and be a permanent fixture on the credit scene.