A lot of people have been emailing me recently to ask my opinion of the new VantageScore credit scoring system; the short answer is that it isn't much of an improvement over the current system, and what little benefit it does offer will almost definitely not become widespread because the system provides no incentive to lenders to use it.

The new system was cooked up by the three major credit bureaus (Equifax, Experian and TransUnion) to try to supplant the FICO score that most lenders use; the credit bureaus claim they came up with the new system to try to simplify and standardize credit scores, but the more probable reason is that they want to get a larger cut of the pie that Fair Isaacs, the company that calculates the FICO scores, has an effective monopoly on.

Currently, FICO scores range from 350 to 850, with higher numbers being better, and the new VantageScores will instead range from 500 to 990, with scores also being paired with a “letter grade” of A (900-990), B (800-890), C (700-790), D (600-690), or F (500-590); since most Americans are fairly familiar with such letter grading systems, and since the 500-990 scale corresponds roughly to a 50%-100% grading scale that some schools use for determining those letter grades, it could be argued that the new system would in fact make it easier for consumers to understand how good their credit rating is.

There are three big issues with the new system, though.

1. The biggest problem with the existing system isn't that consumers don't know what their scores mean–it's that their scores are often highly variable from one credit bureau to the other. Those variations come from two sources: one, the differences in the information that each credit bureau feeds through the FICO algorithm, and two, the differences in the information that each credit bureau has on file for a given consumer; as Michelle Singletary points out in the Washington Post, the new system will eliminate the first source of variation, since all three bureaus will be applying their new algorithm in the same way, but it will do nothing to change the second source of variation, which most experts believe is a far greater cause of innacurate credit scores. So the new system won't really create a more standardized set of scores–until the credit bureaus commit to eliminating inaccuracies in the credit reports on which credit scores are based (which they won't do anytime soon, as they have no real financial incentive to do so), all the new system will provide is scores whose variation from one bureau to the next will just be slightly smaller.
2. Slightly smaller variations plus slightly more understandable numerical scores might be a valid reason to use the new system, but it introduces a new, huge problem for lenders that would eclipse those tiny improvements–it invalidates all of the statistical models that lenders have come up with based on the current scores. Lenders use statistics and actuarial tables to decide which loans to issue and at what interest rate to issue them; without those statistics, they would essentially be gambling with their money, with no real way of knowing if in a few years they will have made a profit or if they will have gone bankrupt. Since there is no direct mapping between FICO and VantageScore ratings–one consumer who gets a FICO score of 700 might get a VantageScore of 880, while another consumer with a FICO score of 700 might get a VantageScore of 855, or 900–all of the lenders' current statistics become useless; while I'm sure that the credit bureaus will provide alternative statistical models for lenders to use, there's no reason for a lender to abandon a system based on probably billions of data points accumulated over decades and that they have evidence actually works, in favor of a generic model that they have no reason to believe would be any better than what they are using right now–especially not when you factor in the immense cost in technology of rewriting every one of their processing programs to use the new scores.
3. Lastly, VantageScore suffers from having an unwieldy name. FICO is short, and easy to say (it rhymes with “eye glow”, for reference, and the emphasis is on the first syllable). VantageScore is 50% longer, syllable-wise, and the “jsk” sound in the middle just doesn't roll of the tongue of most English-speakers; even lenders who shorten it to “Vantage” will still be saying 3 syllables vs. 2 if they pluralize them (e.g. “pull your FICOs” vs. “pull your Vantages”). It's a small thing, but it could be the nail in the coffin for VantageScore, given everything else working against it.

That's not, of course, to say that VantageScore is DOA. If the credit bureaus were smart, they would take a long-term view, and start providing the VantageScore ratings for free alongside any request for a FICO score; it's possible that, over time, lenders would accumulate enough data about how FICOs and Vantages correlate to make it reasonable for them to switch models, and at that point, if the Vantages were to be offerred at a discount as compared to the FICO scores, it's possible that lenders might be willing to switch.

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Tags: credit-score, mortgage