The three main credit bureaus have announced that a new credit scoring model will be in place by Fall 2006. VantageScore will be used by Equifax, Experian and TransUnion as a more consistent predictor of consumer risk. Many lenders should have access to the score by Summer 2006, while consumers may have to wait a few months.
The existing FICO based credit scoring model was developed by Fair Isaac Corporation. Fair Isaac’s model assigns values to credit items contained within your report and calculates your credit score from those values. Simply put, negative items will reduce your score and positive items will build your score. Each credit bureau changed this model slightly by adapting their own algorithm to develop their version of your credit score.
The credit bureaus state that VantageScore improves upon the previous scoring models because it uses only one formula across all three bureaus. Each bureau would still have its own credit score because the information reported to all three bureaus is not identical. Some creditors still only report to one or two bureaus.
Scoring Model Could Backfire
There is a chance that an industry switch to the VantageScore could backfire for the bureaus. They have come to rely on sales of Tri-merge credit reports (3-in-1 credit reports) to boost their revenues. Industry experts estimate that VantageScore could reduce the variance between the bureaus’ credit score product by 30%. This means that the range between your highest score and lowest score would be a third smaller. As a result, there may be less incentive for consumers to request a Tri-merge report since the scores will appear more like three of the same thing.
Still, it is expected that each bureau will continue to push the VantageScore consumer report. Credit bureaus have looked for ways to cut Fair Isaac Corporation out of the mix. A substantial portion of sales has historically gone to Fair Isaac in the form of royalties. Now that money can stay with each bureau. Also, costly credit monitoring services and identity theft products will likely be marketed even more aggressively to further boost revenues.
The Danger Ahead
The Fair and Accurate Credit and Transactions (FACT) Act of 2003 may have had some undesirable effects. Although the rights granted to consumers are a good thing, they may end up with less choice. One member of Congress stated “be careful what you ask for.” The bureaus have aggressively competed in the past to gain market share and to maximize profits. Now that Congress has forced collaboration between the bureaus, there are obvious incentives to collude on pricing. Collusion is an illegal, anticompetitive practice, but there may be little that authorities can do. After all, the collaboration between these companies was forced by federal law. With an effective monopoly on consumer credit scoring, the three VantageScore partners have the ability to set the price and control access to information like never before.
We are not stating or implying that collusion is taking place, only that the conditions are favorable for this to occur. And if it does, it will surely take another act of Congress to “fix” it. The bottom line is that this is another product that has been introduced to the market, and only time will tell if it survives as a viable consumer product. It will either add to consumer choice, replace the current credit score products or be passed over by lenders and consumers alike. If there is one thing that is certain, the VantageScore that lenders see will be different than the product that consumers see.
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