Credit Scoring of the Future

The credit reporting agencies are working to change the way credit is scored. However, it might be a daunting task. First, they have to overtake the standard in credit scoring – FICO.

In 1956, Bill Fair and Earl Isaac founded a company called Fair Isaac. In 1958, they developed and introduced the credit scoring system. In 1989, the first FICO (F-Fair, I-Isaac, and CO – company) score was created called the Beacon score. This was developed through Equifax. The FICO score, as it is commonly referred to, was adopted as the standard for scoring credit.

Each credit reporting agency has their version of the FICO score.

Trans Union - Empirica Score (FICO score using information from Trans Union)
Experian - Experian/Fair Isaac Score (FICO score using information from Experian)
Equifax - Beacon Score (FICO score using information from Equifax)

Fair Isaac has kept the mathematical formula for the credit score a secret; however, we do have an idea concerning the make-up of the score.

Credit Scoring of the Future

The credit reporting agencies have had to rely on Fair Isaac for credit reporting. As a result, Fair Isaac shares in the revenues from each of the credit reporting agencies. As you might imagine, the credit reporting agencies would like for that to change.

In 2006, the three credit reporting agencies announced a new credit scoring called the Vantage Score. They developed this system to make credit scoring more accurate and consistent.

Credit scoring is based on the FICO model of 300 to 850. The Vantage Score is based on a range of 501 to 990. The Vantage Score would be utilized by all three credit reporting agencies and bring some uniformity. This scoring system apparently takes more factors into account than FICO. Where you fall on that scale would determine your grade of A to F.

A: 901–990
B: 801–900
C: 701–800
D: 601–700
F: 501–600

The scoring breakdown for the Vantage Score is as follows:

Payment history……………. 32%
Credit Utilization…………... 23%
Credit Balances…………….. 15%
Depth of Credit…………….. 13%
Recent Credit………………. 10%
Available Credit……………. 7%
(SOURCE: Wikipedia)

FICO is very entrenched in the business community as the preferred method of calculating credit scoring. At the same time, there are some flows in the system that I feel prevents an accurate representation of a consumers ability to be responsible with credit. The 3 credit reporting agencies feel the same way.

The bad news is that this new scoring system puts much more emphasis on total debt and the credit utilization ratio. That could be bad news for a lot of consumers.

There probably is not much to worry about at least for now. Although the 3 credit reporting agencies are working very hard to replace FICO with the new Vantage Scoring system, it is going to be an uphill fight. With FICO having a long-term hold on the credit reporting market, this should be quite a long drawn out battle within the industry to change from the FICO score to the Vantage Score.