Your new credit score

April 7, 2006

Bureaus join forces to develop a uniform model.

Your three-digit credit score, the primary indicator of creditworthiness, helps determine your loan or credit card interest rate, and even your insurance premiums. Lenders and the three major credit bureaus-Equifax, Experian, and TransUnion-primarily rely on the FICO scoring model, a proprietary formula from the Fair Isaac Corporation, in which scores range from 300 to 850. In addition, each of the bureaus uses its own scoring model. Due to differing methodology, and because credit grantors don't uniformly report consumer data, if you purchase a credit score from all three, you'll receive three different scores.

In an effort to achieve greater uniformity, the credit bureaus joined forces and, last month, announced a new scoring model called Vantage-Score. "Lenders wanted a score that's more predictive of a borrower's ability to repay a debt," says Experian spokesperson Donald Girard. The credit bureaus claim that their new model may give lenders a more consistent snapshot of a consumer's risk profile, since they'll all use the same scoring methods. And, they say, it could potentially give people a better way of measuring their financial health.

The folks who will benefit most by VantageScore are the "thin-file" population with little or no credit history, such as immigrants or young adults. "These groups used to have no score due to insufficient information," says Equifax spokesperson David Rubinger, "but VantageScore can parse the same data into thinner slices and help create an environment where a score will be returned, enabling many more of them to get credit."

As soon as VantageScore was launched, lenders were given immediate access, and the initial response has been positive, according to Rubinger. Once it's adopted by the lending community, the credit bureaus will begin marketing it to consumers, which is estimated to be sometime this summer.

Unlike FICO's solely numeric system, Vantage-Score uses a scale of 501 to 990 that may be paired with letter grades from A to F. Credit bureaus feel consumers are familiar with the academic grades from school, so they'll be easier to understand. Yet confusion hasn't been wholly eliminated; Equifax won't use the letter grades, and FICO scores aren't disappearing so quickly. "No one can yet say how [the new score] will do," says Craig Watts of Fair Isaac. "It takes lenders a long time to incorporate and test a new product into the fabric of the credit-decision process."

So, for the foreseeable future, there will be two potentially confusing systems. For example, a score of 750 is in the second-highest grouping on the traditional FICO scale, but it only equals a grade of C on VantageScore's system. As financial analyst Greg McBride of Bankrate.com says, "If someone says he has a score of 750, you have to ask, 'On whose scorecard?' "

Whether VantageScore will replace FICO as the gold standard remains to be seen. In the meantime, McBride says, "Consumers will still need to pay bills on time, keep low balances, and continue taking the same credit-smart actions they always have, no matter who's keeping score."