In theory, your credit score should be simple: three digits that correspond to how big of a risk lenders take when they extend credit to you. But in practice, it’s anything but.
Consumers are frequently stymied by a bevy of different scores tailored to measure everything from risk as a mortgage-holder to risk as an insurance customer. While the scores are often similar, sometimes there can be wide discrepancies that hurt people’s ability to get the best rate on a loan or a large line of credit. Now, a recent court decision paves the way for yet another entrant into this field. Will adding another score simplify things for consumers or just make the logic behind credit scores even more impenetrable?
(GALLERY: 5 Ways To Repair A Trashed Credit Score)
First of all, it’s worth noting that this new player isn’t really new. Dubbed VantageScore, the product was introduced five years ago by the three major credit bureaus, which worked jointly to create an alternative to FICO scores. FICO is the dominant credit score used by lenders and had been battling VantageScore in court since 2006. Last week, a the Eighth Circuit U.S. Court of Appeals rejected a FICO appeal; VantageScore says this will help accelerate the adoption of its alternative scoring model.
Consumer advocates are divided on the benefit VantageScores offer to consumers, mostly because they have bigger gripes about the way consumer credit scores are handled. “Our position is if it’s about the consumer, the consumer should be able to get a copy,” says Chi Chi Wu, staff attorney at the National Consumer Law Center. “The bigger issue is we think they should be entitled to get a copy of it.”
This is where VantageScore has an edge. When you purchase one from credit bureaus TransUnion or Experian, you’re seeing the exact same score that lenders see. FICO, on the other hand, says the scores it offers consumers are “calculated from the same FICO scoring models that lenders request most often at Equifax and TransUnion,” according to a spokesman, which means they’re not necessarily the same scores, a point that rankles consumers.
Regulators also aren’t thrilled. According to a recent report issued by the Consumer Finance Protection Bureau, “A consumer, unaware of the variety of credit scores available in the marketplace, may purchase a score believing it to be his or her ‘true’ (or only) credit score, when in fact there is no such single score.”
(MORE: New CFPB Thinks Credit Scoring is Confusing, Too)
A big part of the reason consumers don’t see the same FICO score as a lender is that there are many, many different possible FICO scores; the scoring formula is tweaked based on whether the lender is trying to ascertain risk for a car loan, mortgage, credit card and so on. Plus, the three credit bureaus can have different information — for instance, one might have an erroneous report of an outstanding debt, which would lower a person’s score from that bureau — which complicates matters further. “You really do want a single number, but obviously, that doesn’t work,” says the NCLC’s Wu.
Another factor that could add to the confusion for consumers is that while FICO scoring goes from 300 to 850, VantageScore scoring goes from 501 to 990. VantageScore has tried to address this by assigning letter grades from A to F through scores to give people an easy-to-understand idea of their credit’s health. It’s also unclear how many lenders use VantageScore. The company says all five of the biggest credit card issuers use it. Banking giant Chase now uses VantageScore, but a spokesman wouldn’t tell us for what divisions or whether it’s used in conjunction with or instead of FICO scores.
“I don’t think the introduction of VantageScore helps unmuddy the water,” Wu says. The problem isn’t with VantageScore, per se; it’s with the entire consumer credit-scoring business. “Competition doesn’t really work right in this market,” she says, because the primary customers are lenders rather than consumers. As a result, the system isn’t designed with consumers’ priorities and concerns in mind. For instance, if you’re going to buy a car, you can’t request that the lender base the terms of your loan on a particular FICO score or on a VantageScore; it doesn’t work that way. The buyer is at the mercy of the lender, and he or she won’t get to see the exact score being used unless they’re either turned down for their loan or receive a less-favorable rate based on their score.