3/27/2013 6:30 PM ET|
New credit score could change lives
VantageScore 3.0 has some advantages for consumers. But it has yet to make big headway with lenders, who generally rely on more-established systems.
Stop me if you've heard this before: A new credit scoring formula has been announced, and it will make life so much better for consumers. It will be more fair, more inclusive and less arbitrary.
The latest credit score to attract such hosannas is VantageScore 3.0, the third version of the scoring formula the credit bureaus created as an alternative to the dominant FICO system. Its creators say the new version of VantageScore:
Ignores paid collections. This comes as good news for the millions of people who have unknowingly had a medical bill, parking ticket or library fine slip into collections. FICO scores continue to punish people who have paid off overdue debts (although unpaid debts hurt scores more).
Allows more people to get scores. People who haven't used credit in a while, who use credit infrequently or who have just established credit would be able to get VantageScores even if their credit files couldn't generate FICO scores. VantageScore will generate scores for 27 million to 30 million "creditworthy consumers," lenders are being told, with nearly 25% of those being "prime or near-prime credit quality -- excellent candidates for mainstream lending products."
Cuts disaster victims some slack. Lenders can put special codes on accounts owned by people affected by natural disasters, and those accounts are ignored in generating credit scores. Unfortunately, that means good behavior is made invisible along with skipped payments and other problems. VantageScore 3.0 ignores only the negative information.
Doesn't "overreact" to economic downturns. Delinquencies, defaults, repossessions and foreclosures soar during recessions. These negative marks may not hurt you as much under VantageScore 3.0, which used data samples from two time frames: 2009 to 2011 and 2010 to 2012. This approach reduces how dramatically the formula reacts to consumer behavior during volatile economic periods.
Also, VantageScore 3.0 will have the same numerical range as the FICO -- 300 to 850, instead of the 500 to 990 range of VantageScores past. Although a 750 VantageScore may not mean the same thing as a 75O FICO, using the traditional FICO scoring scale could lessen consumer confusion and make it easier for lenders to switch.
Sounds great so far, right?
Here's the problem: In order for any new score to benefit you, a lender has to choose to use it when evaluating your creditworthiness. And lenders aren't exactly eager to embrace change.
This isn't just a problem for FICO rivals, by the way. FICO's creators often face uphill battles getting lenders to adopt new versions of its scores, as well, said credit expert John Ulzheimer, the president of consumer education for SmartCredit.com and the author of "You're Nothing But a Number."
FICO's NextGen, which attempted to expand the universe of people who could be scored, pretty much flopped. Even the latest iteration of its premiere formula, FICO 8, hasn't been adopted by every lender (although reportedly about 4,000 lenders are using it).
Here's how a lender's choice of scoring systems could affect you. Say you have a $50 collection account from a medical bill your insurance was supposed to pay but didn't. You discover the problem and pay the collector. If your lender uses VantageScore 3.0 or even FICO 8, which ignores collections under $100, your scores won't be affected by this blemish. If your lender uses the classic FICO, you might get charged a higher interest rate or even get turned down for a loan or credit card.
VantageScore has made more inroads than previous FICO rivals. VantageScore creators say the scores are used by:
- Seven of the top 10 financial institutions.
- Six of the top 10 credit card issuers.
- Four of the top 10 auto lenders.
- Four of the top five mortgage lenders.
Exactly how these lenders employ VantageScores isn't necessarily clear, however.
"When they say a lender uses this score, 'uses' is a very, very general term," said Barry Paperno, a former FICO executive who is now community manager at Credit.com. "They might use it in one of their portfolios such as secured cards or in one region of the country. Or they could be testing the score."
Other scenarios: Lenders could be using the scores to prospect for new clients, whom they would then evaluate with traditional FICO scores. Or they could be using VantageScores to entirely replace FICO scores.
That last scenario may be the least likely, since FICO still has an estimated 90% of the credit-scoring market.
Might we at least hope that FICO will adopt some similar changes as a result of competitive pressure? Ulzheimer cautions that the FICO creators focus on data, rather than on public opinion.
"Credit score developers don't make changes unless their data and research tells them to," Ulzheimer said. "PR (public relations) isn't why credit scores are modified."
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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SCREW THE CREDIT BUREAUS !!!
Do not fall for this crap! The banks own system that they created is now making it hard for them to give loans. So now they decide to change their system to make sure you again qualify for loans! Credit scores are a scam created and controlled by the banks. Stay strong...Keep paying down your debt. Don't "allow" them to qualify for a loan you may not be able to repay!
This is just like the banks "low interest" credit card rate. Do not be taken in by this!
Piss on the banks and their shills, the credit bureaus.
BLAH, BLAH, BLAH, BLAH..................
I could care less about my "Credit Score" It's nothing but a Bank Trap !
Here's the elephant in the room... OVER 70% of the current credit scores are in error!! But why change? Lenders can, as you noted, charge higher interest rates due to lower credit scores caused by the errors. Consequently, they make more money. Again, why change?
Most of the system(s) in place they tend to benefit the BIG guys. Loans on cars, houses, etc.. have been producing large amounts of income for the financial folks for a long time.
Good luck changing this money maker.
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