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FICO vs. VantageScore

There is a fight going on with credit scores. It is the FICO credit score against the big three credit bureaus. Read on for details.

FICO, Fair Isaac Company, is the creator of a system to give consumers a credit score. A credit “score” simply assigns a number to indicate how much risk you pose as a borrower. Fair Isaac’s formula for scoring is the one lenders have chosen to use as they like it the best.

The three big credit bureaus are Equifax, Experian and TransUnion. They are private companies that each track your accounts, balances and payment habits which make your credit report. They recently worked together to make a new credit score call VantageScore.

Every time a retailer or merchant asks one of the credit bureaus for your credit score, the data the bureau has collected about you is sent through the proprietary FICO model. The lender pays the credit bureau for the score, and the bureau pays FICO for using its formula.

This is quite a lucrative business for Fair Isaac as credit scoring accounts for 20% of the company’s revenues and 65% of its operating profits.

Upon reviewing this data, it is only logical that the bureaus want to cut out the middleman.

The bureaus previous attempts to break Fair Isaac’s stronghold were unsuccessful. However, the VantageScore may be a different story.

Investors certainly think so as evidenced by the 6.6% decrease in Fair Isaac’s stock on the day the new scoring system was announced. This is despite the fact that the bureaus had yet to sign up a single lender.

VantageScore ’s system even if it does not replace FICO’s, could be used as leverage to get Fair Isaac to lower its prices.

To remain individual from each other FICO and VantageScore use two different ranges. The FICO scale runs from 300 to 850. It is usually the FICO score numbers you see in the pop-up adds as well as TV ads. VantageScore starts at 501 and runs to 990. The bureaus say the VantageScore range is more “intuitive,” because it breaks down like an elementary-school report card:

           901-990 equals "A" credit
801-900 equals "B" credit
701-800 equals "C" credit
601-700 equals "D" credit
501-600 equals "F" credit

Possibly adding confusion to credit scores by the credit bureaus would be the factor that each credit bureau has different data on the consumer. You may have accounts reported at one bureau that don’t show up at the other two, or you may have successfully disputed an error at two of the bureaus only to have the third refuse to correct the error.

VantageScore hasn’t been tested head-to-head with FICO making it too early to determine if the new system is superior.

FICO’s favor with lenders is the model’s consistency. Even though the bureaus collect and report credit information differently, the same basic FICO model is used at all three to generate comparable scores.

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