Standardized Credit Score Is Unveiled
The nation’s three biggest credit-reporting firms said Tuesday that they would standardize how they calculate consumer credit scores, with the goal of making the numbers easier for lenders and borrowers to understand.
The joint move by Equifax Inc., Experian and TransUnion also amounts to a competitive challenge to Fair Isaac Corp., the developer of the well-known FICO credit-scoring system.
Credit scores are three-digit numbers used by banks, auto dealers, landlords and others to assess consumers’ willingness and ability to pay their debts.
By and large, a high score gives a consumer more credit choices and better interest rates on loans.
The three major credit-reporting firms have long used individual formulas to calculate credit scores, with varying grades a possible result.
The joint scoring system, called VantageScore, will give consumers “a consistent score that they can understand and use,” said Kerry Williams, head of Experian’s credit services unit.
The companies will continue to compete by separately collecting data for credit files, which they sell to creditors and consumers.
But an individual’s credit scores from the three firms should be the same if the companies’ files on that person contain the same data, executives said.
The system will give scores ranging from 501 to 990, which in turn will translate to grades of “A” through “F”: Consumers with scores above 900 will be “A” credit risks, those with scores above 800 but less than 901 will rate a “B,” and so on.
FICO scores, by contrast, range from 300 to 850.
With any grading system, consumers can expect to score well if they consistently pay their bills on time, have a long history of paying different types of bills and use their credit modestly.
“That’s universal,” said Chet Wiermanski, vice president of analytics at TransUnion. “All credit models are evaluating those things. The difference is how they are evaluated and who is considered a good or bad risk.”
The companies said the new scoring system would give people with limited credit histories a better shot at loans.
But some analysts said they weren’t convinced that the standardized scoring system would make loans more available or lending decisions more predictable for consumers.
Ed Mierzwinski, consumer program director with the U.S. Public Interest Research Group in Washington said an ongoing issue was the accuracy of the underlying reports from the companies. “Our last survey showed that 29% of credit files had serious errors that would affect the consumer’s ability to obtain credit,” he said.
On Wall Street, Fair Isaac’s shares fell $2.79, or 6.6%, to $39.37 on Tuesday, apparently because of the prospect of more competition. As a developer of scoring technology, Fair Isaac is both a supplier to the credit-reporting firms and a competitor.
Ron Totaro, vice president and general manager of global scoring solutions at Fair Isaac, said the credit-reporting companies “have all had their own credit scores that they have tried to sell against us, and they’ve been wildly unsuccessful. This is them trying to take another crack at our fortress.”
FICO scores are used in more than 75% of lending decisions made by banks, mortgage brokers and auto dealers, Totaro said. “Even assuming this is a slightly better mousetrap, I think it’s going to be very hard to get lenders to switch,” he said.
Shares of Atlanta-based Equifax rose 48 cents to $38.53. Chicago-based TransUnion is privately held. Costa Mesa-based Experian is a unit of Britain’s GUS.