In March 2006, the three major credit-reporting bureaus (Experian, Equifax and Trans Union) announced a joint venture that will compete directly with credit-scoring giant, Fair Isaac. The new company, called Vantage Score Solutions, LLC, will market their own credit-scoring software which produces a credit report card called “Vantage Score.” The main pitch being used by the credit bureaus is that this score will be similar across all three bureaus and lessen the wide gap currently seen between the high and low credit scores when using Fair Isaac’s Classic FICO credit-scoring model.

Vantage Score will be independently marketed and sold by each of the three credit reporting companies through licensing agreements with Vantage Score Solutions, LLC. Although Vantage Score Solutions, LLC, is equally owned by each of the three credit bureaus, they want to keep the profit potential somewhat separate by marketing the product separately. Basically, the company that sells the most “score pulls” will make the most money since each bureau will charge a fee for each score and only have to pay the parent company “Vantage” a portion of the fee they are charging the consumer or credit company for pulling the score.

Vantage Score ratings will range from 501 to 990. The high and low ends start slightly above the Classic FICO scores currently in use which are 300 to 850. Vantage Scores will be grouped in a report-card format with A being the best and F being the worst. This grading system is meant to make assessing a consumer’s credit worthiness less difficult than under the Fair Isaac’s FICO model. The grading system and corresponding range for the new Vantage Score will be as follows:

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

Vantage Score is similar to the Classic FICO model in that it:

Vantage Score is different from the Classic score in that it:

• Returns a score range of 501-990 rather than 300-850
• The top and bottom score will have less variance than they currently do with Classic FICO thanks to leveling characteristics obtained through the sharing of information across the three bureaus when determining what value to place on a particular credit event. Keep in mind that differences in the data itself will still cause scores to vary.
• The Classic model may return a zero score if a consumer’s credit file is too thin or lacks recent activity; Vantage Score will return more usable credit scores for those with limited credit histories.

Let’s cut to the chase! Shall we?

While Fair Isaac’s Classic FICO model was developed using 3 million credit reports (1 million from each bureau), the Vantage Score model was developed from a national sample of 15 million consumer credit profiles (5 million from each credit bureau). This larger test group would lead one to believe that the predictive accuracy would be better with Vantage, but the algorithms used to analyze the data are what really counts. If Fair Isaac has superior algorithms, then the fact that Vantage used 15 million reports to develop the score has zero relevance if their method of analyzing those additional reports is sub par. The only way Vantage can make a huge impact on the lending industry is if they can get Freddie Mac and Fannie Mae to endorse the use of their scoring model and replace the Classic FICO version as the standard in the mortgage industry.

A Very Monumental Task, Indeed!

It is not enough to prove your scoring software is more predictive and accurate to win Fannie and Freddie’s approval; just ask Fair Isaac. Fair Isaac has had a credit scoring model called “Next Generation Scoring” on the market for a few years now and has yet to win the blessing of Fannie and Freddie even though it is better than Classic FICO at predicting whether or not the consumer will go 90-days late in the next 24 months. Why? Because change is hard. There are hundreds of “tri-merge” companies that have the Classic model built into their system, and changing the software is time consuming, costly and complicated. Fannie and Freddie also do not want to deal with the transition problems where some resellers will still have the FICO model with scores ranging from 300 to 850 and others using Next Generation will score from 150 to 950.

Guess What the Big Three Have Been Up to in the Past Few Years?

Not many people are aware of this, but the big three bureaus have been buying out the the little credit bureaus (known as resellers) by the dozens in order to monopolize the reseller market. Resellers are what used to be considered satellite offices for the credit bureaus. They actually functioned as credit bureaus on a smaller level and were more tied into the bureaus than the tri-merge companies we all know today. The tri-merge companies function as resellers to a degree but they offer all three credit reports merged into one.

The tri-merge industry is mostly controlled by only a few big companies. There are still a hundred or so small tri-merge companies left, but the bureaus would have them go the way of the reseller if they have their way…and they are having their way. How do the big three deal with these smaller entities? They charge more for the credit data in an effort to legally squeeze them out of business so they only have to deal with a few players in order to forward their agenda. If the big three scratch the backs of the key players in the tri-merge market, they will not only make it easy to call in favors, but will also only have to deal with implementing their new Vantage Score into a dozen or so systems after getting the green light from Fannie and Freddie. Then it won’t be as hard to convince Fannie and Freddie to give the thumbs-up to the new scoring-model since the bulk of the implementation tasks will fall on the tri-merge companies who will be open to the change.

Sorry, Fair Isaac, You Lose!

What do you think the three bureaus will do next? Start calling in the favors owed to them by the tri-merge companies. Even if Fair Isaac offers their credit score to the tri-merge companies at half the price of Vantage Score, the big three can still push Fair Isaac out of business because price isn’t always the most important consideration. The tri-merge company’s pricing is regulated so they could charge ten times their cost for the scores. On the other hand, the bureaus could use pricing breaks to push the tri-merge companies in the direction they want them to go. Do what I say or I increase your cost for the credit data. Did somebody say “unfair competition”? You bet.

Now the only hurdle left for Vantage is to prove their scores are more accurate at predicting serious delinquencies than the Classic FICO model. Once they prove that, Fair Isaac is gone.

Fair Isaac Still Has A Heartbeat, For Now at Least

This will not be a fast demise for Fair Isaac. Before giving their stamp of approval, Fannie and Freddie will want conclusive proof that Vantage Score will not cause the lending industry to lose money. Each individual lender also needs to be convinced of the accuracy of the risk prediction before they risk giving a million dollar mortgage to a borrower. Additionally, lenders have created extensive lending guidelines around the present Classic FICO scoring model. Fair Isaac also has lots of goodwill built on the accuracy of their data, and the chance for the lenders to save a few dollars on a credit score won’t be considered unless they are certain the data is reliable. Change in scoring models does not happen overnight–even if you are the big three credit bureaus–and will take extensive case studies that compare the results of the FICO scoring model to those of Vantage. I would guess it would be at least two or more years before Vantage has a chance at winning over the mortgage industry, but once they do, they will monopolize the industry and be able to triple their prices without much recourse for the companies that use their services. I predict a decrease in the price of credit scores until Vantage gains control; and then I predict the prices of credit scores will far surpass the prices we pay today. We’ll see.

©2005, Edward Jamison. All rights reserved. Edward Jamison is a nationally recognized speaker on the subject of Credit Scoring and an Attorney who specializes in credit law and the development of software for the credit industry. Visit www.JamisonLawGroup.com. Edward is a member of the National Advisory Councils for GoGetLoan.com, GoGetNotary.com, GoGetEscrow.com and GoGetRealEstate.com. Visit his page here.

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