Credit scoring system altered
NEW YORK — The nation’s largest consumer credit bureaus have unveiled a new credit scoring system that they hope will give lenders a better measure of borrowers’ creditworthiness and make the process easier for everyone to understand.
Consumer advocates worry that it won’t necessarily work out that way.
As Jean Ann Fox, director of consumer protection with the nonprofit Consumer Federation of America in Washington, D.C., put it, the new system looks a bit like “a new recipe, but the same old ingredients.”
The credit reporting companies — Equifax Inc. of Atlanta, Experian Information Solutions Inc. of Costa Mesa, Calif., and TransUnion LLC of Chicago — announced Tuesday that they’re introducing “VantageScore” to banks, mortgage lenders and credit card companies. After the lender rollout, the new scores will be available to consumers, probably later this year.
Credit scores traditionally have been three-digit numbers that lenders use to evaluate borrowers. The scores reflect how much debt a consumer is carrying, how good they’ve been at paying back loans and how many credit applications they have outstanding.
The scores are important because lenders use them to decide if they’ll loan money to consumers and at what rate. The higher the score, the more creditworthy the consumer is considered and the lower the interest rate the consumer will be charged.
The agencies in the past each used proprietary formulas to generate their own scores, meaning that a lender dealing with a consumer’s application for a credit card or a mortgage might have to reconcile three widely different scores.
With the new system, a single methodology will be used to create the scores for all three credit bureaus, the agencies said. There will be only minor variations in the results, based on differences in the data each bureau has accumulated in consumers files, they said.
“There’s clearly been a need out there to have a consistent scoring model that works across all three reporting agencies’ data,” said Kerry Williams, group president of Experian’s credit services division. “And consumers need a consistent score that they can understand and use in their own financial lives.”
All well and good, says the CFA’s Fox, but inaccurate information in the credit files maintained by the bureaus has been more of a problem for consumers than inaccurate scores.
“It doesn’t address the underlying accuracy of the credit reports on which the scores are based,” Fox said.
In addition to the credit agency scores, some large lenders generate their own internal scores, often using credit bureau data. And many lenders — including those in the credit card and auto lending businesses — use FICO scores, which are named for the Minneapolis-based Fair, Isaac Corp. that developed them.
Fair, Isaac has done considerable outreach to educate consumers about FICO scores, which range from 300 to 850.
The new system being introduced by the credit bureaus will provide scores ranging from 501 to 990, according to Tuesday’s announcement.
“There could be confusion among consumers unless they make it clear that there are two systems,” said Linda Sherry, a spokeswoman for Consumer Action, which is based in San Francisco. “People have gotten used to thinking a certain number like 700 is a good score. That might be true if it’s a FICO, but might not be under the new system.”