Credit agencies adopt uniform scoring system

updated 4:07 p.m. ET March 14, 2006

NEW YORK - The nation’s three major consumer credit bureaus have created a new credit scoring system designed to make it easier for financial institutions to evaluate loan applications and to give consumers a better way of measuring their financial health.

The credit reporting agencies — Equifax, Experian and TransUnion — announced Tuesday that they’re introducing “VantageScore” to banks, mortgage lenders and credit card companies immediately. The new scores will be available to consumers after the lender rollout, probably later this year.

“There’s clearly been a need out there to have a consistent scoring model that works across all three reporting agencies’ data,” said Kerry Williams, group president of Experian’s credit services division. “And consumers need a consistent score that they can understand and use in their own financial lives.”

Credit scores traditionally have been three-digit numbers that lenders used to evaluate the creditworthiness of borrowers. The scores reflect how much debt a consumer is carrying, how good they’ve been at paying back loans and how many credit applications they have outstanding.

They’re important because lenders use them to determine if they’ll loan money to consumers and at what rate. The higher the score, the more creditworthy the consumer is considered and the lower the interest rate the consumer will be charged.

The agencies in the past each used their own proprietary formulas to generate their own scores, meaning that a lender dealing with a consumer’s application for a credit card or a mortgage might have to reconcile three widely different scores.

With the new system, a single methodology will be used to create the scores for all three credit bureaus, the agencies said.

As a result, scores will be “virtually the same across all three of the national credit reporting companies,” said Experian spokesman Donald Girard. Any difference in the scores provided by each agency will reflect differences in the data they’ve collected in consumers’ files, he said.

The credit reporting agencies said in their announcement that VantageScore “will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply.”

Concerns continue
Consumer advocacy groups expressed concern that the new scoring system would not eliminate one of the biggest problems in the industry which is incorrect information in consumers’ credit files.

“That means it’s a new recipe, but the same old ingredients,” said Jean Ann Fox, director of consumer protection with the nonprofit Consumer Federation of America in Washington, D.C. “It doesn’t address the underlying accuracy of the credit reports on which the scores are based.”

In addition to the credit agency scores, some large lenders generate their own internal scores, often using credit bureau data. And many lenders, especially those in the mortgage business, use FICO scores, which are named for the Minneapolis-based Fair, Isaac Corp. that developed them.

Thomas G. Grudnowski, the chief executive officer of Fair, Isaac, said that “for the past 20 years, we’ve been both cooperating and competing with the credit bureaus ... and that will continue.” He added that it could take a long time to establish a competing system.

“Do the customers ... really want to go through the pain of converting to another system?” he asked. “I think only time will tell.”

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