Since the 1970s, credit scores have played an increasingly vital role in the lending industry. Fair Isaac and Company began assigning credit scores to consumers based upon various factors over 40 years ago, and these scores are now reviewed not only by prospective lenders, but also by landlords, insurers and governmental agencies. But the computation process for the FICO score has some limitations; for example, a consumer has to have a credit line open for at least six months before it will show up on a FICO credit report. This and other deficiencies have led the three major bureaus to establish a new credit score model known as VantageScore, which evaluates customers according to a somewhat different set of criteria that can be much more forgiving in some instances.
A Collaborative Effort
The three major credit bureaus have used the FICO scoring model for decades, but the differences in how each agency computes its scores has led to numerous discrepancies that are often problematic for both lenders and consumers. The VantageScore model is designed to provide a much more standardized grading system than the one used by Fair Isaac and Company. The first version of Vantage appeared in 2006, followed by Vantage 2.0 in 2010, which was modified in response to the changes that swept over the lending industry after the Subprime Mortgage Meltdown of 2008.
The VantageScore Model Methodology
VantageScore credit scores are computed in a fundamentally different manner than FICO scores. They start with a somewhat different set of criteria than FICO and also assign a different weighting to each segment. A comparison of the two is shown as follows:
- The Consumer’s Payment History: 35%
- Total Amounts Owed by the Consumer: 30%
- Length of the Consumer’s Credit History: 15%
- Types of Credit Used by the Consumer: 10%
- Amount of the Consumer’s New Credit: 10%
- Amount of the Consumer’s Recent Credit: 30%
- The Consumer’s Payment History: 28%
- Utilization of the Consumer’s Current Credit: 23%
- Size of the Consumer’s Account Balances: 9%
- Depth of the Consumer’s Credit: 9%
- Amount of the Consumer’s Available Credit: 1%
The VantageScore model is also quantified differently than FICO scores. It still uses a numerical range for its scores, but it also assigns a corresponding letter grade for a given range, in some instances, that helps consumers to understand the quality of their score. The grade is statistically based upon the ratio of consumers who are likely to charge off versus those who will pay on time. The VantageScore system is broken down as follows:
- 901 to 990 = A – 1 charge off for every 300 consumers who pay on time
- 801 to 900 = B – 1 charge off for every 50 consumers who pay on time
- 701 to 800 = C – 1 charge off for every 10 consumers who pay on time
- 601 to 700 = D – 1 charge off for every 5 consumers who pay on time
- 501 to 600 = F – 1 charge off for every 1 consumers who pay on time
As with FICO, the consumer’s creditworthiness matches his or her score and grade. Each of the three major credit bureaus computes a score based on the VantageScore model using its own data. Of course, while all three bureaus use the exact same model to compute the VantageScore credit score, it can still differ from one bureau to another because each bureau typically records slightly different information in their consumer files.
The VantageScore Benefit
One of the chief advantages that the VantageScore model brings is the ability to provide a score to a large segment of consumers (about 30 to 35 million) who are currently unscorable when traditional methodologies are applied. The VantageScore model differs from FICO in that a line of credit only has to be open for a single month in order to be factored in, yet this model takes 24 months of consumer credit activity into account, whereas FICO only looks back for six months. The longer look back period can be a big help for consumers who are working to rebuild their credit and are able to show a marked improvement over the longer time span. The VantageScore credit score is also designed to serve as a “predictive score” for those with thin credit histories by indicating the probability that they will meet their future payment obligations in a timely manner. It can also use rent and utility payments in its computations if they are reported by the landlord and/or utility provider.
The most recent version of the VantageScore model represents a substantial improvement over the previous two models. It was created beginning with over 900 data points from 45 million consumer credit files spanning two overlapping time frames from 2009 to 2012. However, it only uses about half the number of reason codes (which signify various reasons why the consumer’s credit score carries the number that it has been assigned), and these codes have been rewritten in plain language that consumers can easily understand. VantageScore Solutions, the company behind the model, also provides an online resource where consumers can look up their reason codes, which can be found at www.reasoncode.org.
As mentioned previously, the risk assessment formula that is used in the model is now identical for each of the major bureaus because it employs uniform definitions for consumer payment and credit information that is received by each bureau. The VantageScore model also claims that the predictive score in this version will be 25% more accurate than the previous one due to the substantial increase in both the quality and quantity of data upon which the model is based.
Impact with Lenders
Despite the hype with which the three credit bureaus have promoted their new scoring system, it has been slow to catch on in the lending industry. The VantageScore model remains a very distant second to the traditional FICO score in the amount of market share that it has carved out among lenders. As of April 2012, less than 6% of the credit scoring market and only 10% of the major banks use the VantageScore model in their underwriting.
The Bottom Line
Although its method of computation is considered to be more fair and realistic than the FICO model, it will likely take some time for lenders to become comfortable with shifting to this alternative methodology. Nevertheless, the number of institutions that accept the VantageScore model is growing, and its popularity will likely continue to increase with its ability to tap a new market of potential lending customers. For these reasons, the major credit bureaus continue to view VantageScore credit scores as a model for the future.
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