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 the FICO^{® *} 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 the FICO^{® *} one. 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.

* FICO, myFICO, and 300-850 score are trademarks and/or registered trademarks of Fair Isaac Corporation.

The fate of consumers and small business owner’s finances is wrapped in their ability to access credit and capital. This is increasingly the case, but still few borrowers are aware of exactly how their credit scores are determined. To further complicate what may already be a confusing picture for many, there is a new competitor on the market that, if it is successful in the market, will give consumers a second credit score in addition to the one they already have.

The current credit industry is something like a pyramid in its structure. At the bottom are the consumers who want to finance a car or new refrigerator. These individuals seek a line of credit through a credit lender, or the bank that will be providing the financing. This bank pays one of three credit bureaus for your FICO^{® *} credit score. The credit bureau, either Equifax, Experian, or TransUnion, depending on who your lender uses, then pays a company called Fair Isaac.

A consumer’s credit score is a calculation of the risk a lender will be taking in loaning the individual money. Equifax, TransUnion, and Experian all track individual’s fiscal habits: their debts, payment habits, etc. Their compiled information must be placed into a formula, the FICO^{® *} formula that Fair Isaac owns, in order to pop out a number that is the consumer’s credit score. The FICO^{® *} model is very widely used. It is the formula vastly preferred by lenders, who find it predictable and reliable. This is understandable; Fair Isaac has been involved in the credit industry for nearly half a century, and 80% of major lenders use their system to calculate credit scores.

The credit bureaus would benefit greatly from not being required to pay the top of the totem pole (FICO^{® *}) every time they run a credit report. To that end, they have developed and promoted their own credit scoring system, dubbed VantageScore. There are a few differences evident already between the two systems. Most notable to consumers, the VantageScore model employs a different numerical scale than the FICO^{® *} system. FICO^{® *} runs from 300 to 850^® *. The VantageScore model runs from 501-990, and is set up in a grade school fashion. 501-600 is an F or failing rating; 601-700 is a D or poor rating; 701-800 is a C or fair rating, etc. While this may seem like a benefit due to its more logical numbering, consumers will now be assigned two different credit scores depending on which system is being used.

Credit bureaus have long complained of Fair Isaac’s treatment of those with short credit histories, or who have few accounts. The big three bureaus feel that the FICO^{® *} model falsely inflates the credit scores of these individuals, meaning that the FICO^{® *} scoring underestimates the risk that they may pose to lenders. In launching their new VantageScore system, they claim to have more fairly gauged the risk of these individuals. This could likely mean making credit less attainable for these consumers. If this is the case, more young Americans and those who haven’t actively beefed up their credit portfolios will hurt from the new system.

The exact differences, benefits, and downsides of the VantageScore system versus the FICO^{® *} system remain to be seen, but consumers should be watchful of how the credit landscape changes for them based on this new arrival.

* FICO, myFICO, and 300-850 score are trademarks and/or registered trademarks of Fair Isaac Corporation.