Home > Credit Score > Did Credit Scores Just Get Fairer?

Comments 2 Comments

In a move that could have a wide-ranging impact on both the credit scoring business and the availability of credit to consumers, VantageScore Solutions today announced the latest version of its credit scoring model.

The company says that the new model, called VantageScore 3.0, has the ability to generate credit scores for tens of millions of consumers who previously didn’t qualify for a score, and will improve predictability by 25 percent over earlier models for consumers who have higher credit scores by looking at credit data in a more detailed way. It also excludes negative credit information that happened as a result of a natural disaster.

A New Approach to Paid Collection Accounts

Among the most noteworthy features of the new model is the fact that collection accounts that have been settled or paid off will not be included in the score. Many consumers are unaware that currently, paying off a collection does not necessarily rehabilitate a credit score. Other scoring models, including the market-leading FICO score and previous VantageScore models, treat collection accounts — even those that have been paid off — as predictive of a consumer’s likelihood to pay off future debts. According to a press release announcing the new score, VantageScore is able to exclude the collection data and still make accurate predictions.

“This is potentially a big deal,” says Credit.com’s CEO Ian Cohen. “For tens of millions of consumers, one-time mistakes — maybe a single missed payment from a hospital visit — have led to years of subprime interest rates and denied credit. The issue has always been how to keep credit scores predictive so lenders can rely on them. These days, there are plenty of additional data sources available to do a ‘deeper dive,’ so to speak. This could help make credit more individualized. You actually see this approach in the insurance industry, and I’m glad we’re now seeing it in the credit scoring industry as well.”

A Deeper Data Dive

VantageScore Solutions, which is owned by the three major credit bureaus (Experian, Equifax and TransUnion), says it was able to improve predictability in the new model by including finer details in the data that is used to make up a score. For example, in the case of mortgages, payment patterns for different types of loans are treated differently. A 30-year fixed mortgage is not the same as an adjustable-rate mortgage or a home equity line of credit. VantageScore Solutions says this approach to the data is central to the model and it’s what allows for the exclusion of paid collection accounts.

“We went into our efforts to build the VantageScore 3.0 model knowing that consumers with paid and/or unpaid collection accounts are higher risk that consumers without these accounts, thus this information can be usefully predictive.  This is especially true for unpaid collections,” said Sarah F. Davies, VantageScore’s SeniorVice President, Analytics and Product Management  “Using the more granular data in unique combinations that emphasized unpaid collections, we created variables that delivered greater predictive strength than paid collection variables. Given the mandate to deliver the most predictive model, these new combinations were incorporated into VantageScore 3.0.”

VantageScore Solutions says it constructed the model using the anonymous credit data of 45 million Americans, (15 million files were supplied by each of the major credit bureaus), and examined the credit data in those files across two separate two-year time frames (2009 – 2011 and 2010 – 2012).

VantageScore vs. FICO

VantageScore Solutions’ scoring model competes for market share with FICO, the industry leader in credit scores. Among the changes that come with VantageScore 3.0 is the score range, which now uses the same spread as FICO (300 – 850). Previously, VantageScore’s range was 501 to 990.

In a 2006 court case, FICO argued that it had trademarked the 300-850 score range, however a 2011 appeals court decision ultimately rejected that claim and affirmed an earlier court ruling that FICO “obtained its trademark registration through fraud on the United States Patent and Trademark Office.”

According to the press release announcing the new scoring model, the purpose of the new score range is to “facilitate easier implementation for lenders, and more familiarity for consumers.” Indeed, consumers often don’t realize that they even have more than one credit score, and seeing different credit score ranges can be all the more confusing. VantageScore’s new scoring range will go some way in addressing that issue, though the thrust of the change may have more to do with boosting adoption of the scoring model by lenders. By some accounts — and these are unconfirmed — VantageScore holds less that 10 percent of the credit scoring market share, the vast majority of which is held by FICO. VantageScore’s CEO, however, argues that the new model will have a real impact on lending.

“The launch of VantageScore 3.0 advances the entire industry, and lenders will validate their portfolios and see for themselves how the model is transformative and extremely predictive,” says Barrett Burns, VantageScore’s CEO, though he concedes that lender adoption of the new scoring model won’t happen overnight. In fact, it will take at least a couple of months before even the credit reporting bureaus, who helped create the new model, fully incorporate VantageScore 3.0.

“Having been in a lender’s shoes, I know the sales cycle is long and lenders will need time to test the model on their portfolios,” Burns says. “One of the differentiators of the VantageScore 3.0 model is that it was developed with a lender’s implementation needs in mind, and the model opens up a tremendous opportunity to expand their customer base, so I think we’ll see the model gain traction relatively quickly.”

Scoring More Americans

In addition to adopting a more familiar scoring range for lenders, VantageScore is touting 3.0 as a game changer in that it is able to score millions of previously unscorable Americans. The company says the new score does this in part by incorporating more credit data into its standard scoring model. Under this model, those with little or no recent credit data (available credit, revolving balances, late payments, account mix and age of credit accounts) are evaluated using a 13th scorecard that may look at credit data that is older than 24 months, in addition to non-traditional data such as public records, rent, telecom data and other inquiries if that information resides in a consumer’s credit file. According to VantageScore, including this data will make it possible to score between 30 and 35 million Americans who previously couldn’t get a score. This could potentially help to level the financial playing field for these consumers by giving them access to more affordable credit.

Likewise, consumers who have been affected by natural disasters — and as a result have missed payments on bills — may avoid being penalized via their credit score. Though the negative information will still appear on the credit reports, if a lender identifies a borrower with a “disaster reporting code,” then “information that would negatively impact a consumer’s credit score is ‘set to neutral’ so that consumers can continue to benefit from information that would have a positive impact.”

VantageScore has also launched a microsite, ReasonCode.org, in combination with the release of the new score. Reason codes are two characters long and come with brief statements that explain to consumers why their scores are not better. Consumers often receive them when they’ve been notified that they have been denied credit, or have been given a higher than average interest rate on a loan. VantageScore has simplified the reason code language, and created ReasonCode.org as a searchable index for consumers to get more information about the codes and what they can do to improve their credit.

Image: Medioimages/Photodisc

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Pingback: Credit.com Is the First to Offer VantageScore 3.0 to Consumers | Baba Credit()

  • k

    Banking Hits the Wall ( 2008-2009 Financial Catastrophe )
    What have we learned ?

    a. implied “Good Faith and Fair Dealings”, GONE.

    b. manipulation of financial markets, the new game…WAKE UP
    Libor, Mer’s, Usary, Securitization

    c. FICO( Fair, Isaac and Company )…..DireMagic
    misrepresentations affect peoples lives

    d. banks ” Whatever ” We Say ….. uPay.

    e. Collusion amongst the many in the ” Credit Bureau Reporting ”

    f. ignors contract requisites….diminished laws

    Houston … We have a SERIOUS problem …. and I do mean serious.

    Our Constitution(unique) is being DISASSEMBLED
    Roll-over…has a new definition.

    Do you think you can rise to the occasion ?
    Time to RESTORE our Constitution ??? … FutYes


    ps BTW…if you dont know how many ARTICLES there are in the Constitution
    Then u r the problem.

  • Pingback: This Week in Credit News: The New VantageScore 3.0 | Credit.com News + Advice()

  • Dona Collins

    Familiarity for consumers is huge, here. I have always though it was unfair for consumers to have to understand how three different systems work – independently and together when creditors look at all of the scores. I think streamlining the process for determining a score is necessary to eliminate some of the confusion and give consumers a better chance of repairing their scores (especially those who are actually *trying* to do so).

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team