It's the multibillion-dollar question that every credit-card company, auto lender, and mortgage outfit wants to know: If they lend you money, will you pay it back? Fair Isaac -- creator of the famous FICO score -- is the company that answers that question most often today. But on Mar. 14, the Big Three credit-reporting companies unveiled what had been a tightly guarded secret plan to knock Fair Isaac from its throne and become the dominant provider of credit scores to lenders.
For most borrowers, this is a good thing. More intense competition will force everyone in the credit-scoring business to assess default risk as accurately as possible (see BW, 11/28/05, "Anatomy of a Credit Score"). Creditworthy people who were unfairly lumped in with deadbeats are more likely to get credit now, and at lower rates. Of course, poor risks who were accidentally given loans are more likely to be rejected if accuracy improves. On the whole, though, lenders will tend to make more loans, at lower rates, if they have increased confidence in the accuracy of credit scores.
SETTING STANDARDS. VantageScore was announced jointly by the top credit-reporting giants: Equifax (EFX), Experian, and TransUnion. Scores will range from a sterling 990 down to a bankrupt 501. In contrast, FICO scores range from 850 to 300. As a gimmick, VantageScore may also be reported as a letter grade -- from A through D, and F.
To create VantageScore and better compete with Fair Isaac (FIC), the three rival credit bureaus set aside their differences and started from scratch, using raw data on millions of people in their databases. They devised a standard way to categorize borrowers, as well as a standard recipe to determine creditworthiness. The bureaus won't share data. Instead, each will use the recipe on its own data to produce a credit score. The only source of difference between bureaus' VantageScore results will be the raw data -- such as missing or inaccurate information -- not scoring methodology.
Until now, the three bureaus offered their homegrown credit scores for sale to lenders but didn't get as many takers as they'd hoped, because many lenders preferred FICO scores. Experian and Trans Union also sold their scores directly to consumers. It has been highly frustrating to lenders -- and to borrowers -- that the same person could get drastically different credit scores from different bureaus.
SUBPRIME MARKETING. On the bright side, the companies say that using VantageScore reduces by about 30% the wide "dispersion" in scores that the different bureaus generate. On the not-so-bright side, that means that 70% of the dispersion remains. That's because VantageScore can't overcome the problem of incomplete or inaccurate information. "Garbage in, garbage out," says Greg Fisher of Dayton, Ohio, who runs two Web sites on the subject, creditscoring.com and creditaccuracy.com.
While acknowledging that VantageScore isn't perfect, its authors say their tests show it makes better predictions about loan applicants who have "thin files," such as young people with no credit history. It should also help lenders better segment less creditworthy "subprime" borrowers, so they can figure out which ones to market to and which to stay away from, says Dana Wiklund, senior vice-president for predictive sciences at Equifax (see BW Online, 9/14/05, "Subprime Lenders Bear Scrutiny").
While it may not matter much to consumers, a big issue for the industry is how VantageScore will fare against Fair Isaac. The Big Three say they haven't yet measured its performance vs. FICO. Fair Isaac, with revenues of nearly $800 million last year, says it counts 99 of the top 100 U.S. banks as clients. However, investors see a challenge. Fair Isaac shares fell nearly 7% on the news of the competing system.
ANTITRUST CONCERNS? Fair Isaac Chief Executive Tom Grudnowski said in an interview that FICO scores are deeply embedded in the way lenders evaluate loan applications. The biggest challenge for the credit bureaus, he says, will be to prove that their score is so much better that it justifies ripping up the way they do things now. Says Grudnowski: "There's got to be a really compelling reason to convince an institution to change."
There's also the question of whether the close collaboration between three industry rivals could be perceived by antitrust regulators as an attempt to squelch competition and raise prices. A Justice Dept. spokeswoman on Tuesday said the department would have no immediate comment. A Federal Trade Commission spokesman did not immediately return a phone call. Only time will tell how they rate VantageScore.