What the new credit score means to you

By Liz Pulliam Weston

The three credit bureaus are touting their new credit-scoring system as a boon for borrowers, easier to understand and more "consistent" than other scoring methods.

Maybe. But VantageScore, which uses the same underlying data about your debts as the FICO score you already know, also poses some serious risks. And let's be clear: This isn't about making credit easier for the little guy. This is business.

Big business.

Equifax, Experian and TransUnion are private companies that each track your accounts, balances and payment habits. A credit "score" simply assigns a weight to those factors to produce an indicator of how much risk you pose as a borrower. Fair Isaac's formula for scoring is the one lenders like best.

Every time an appliance store or car dealership 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. Credit scoring accounts for 20% of the company's revenues, according to Merrill Lynch analyst Edward Maguire, but 65% of its operating profits.

The bureaus, naturally, want to cut out the middleman.

"They don't like having to pay Fair Isaac for anything," said mortgage broker Ginny Ferguson, who teaches credit scoring to her colleagues in the National Association of Mortgage Brokers. "The (credit bureaus) are intent on finding the next area of revenue generation."

The bureaus have tried to break Fair Isaac's stranglehold before, with no success. The VantageScore may be a different story.

Investors certainly think so; they drove Fair Isaac's stock down 6.6% on the day the new scoring system was announced, even though the bureaus hadn't signed up a single lender. Analyst Maguire rightly called VantageScore "a shot across the bow" of the bureaus and opined that even if the new system didn't replace FICOs, the bureaus could use it as leverage to get Fair Isaac to lower its prices.

We wouldn't have to care about these elephants' battles, except that consumers may be the grass trampled under their feet. Here are just some of the concerns:

Credit score confusion

FICO and VantageScore use two different ranges. The classic FICO scale runs from 300 to 850, while the 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

But nothing is really intuitive about credit scores, particularly for consumers who are already confused about how FICO scores work. At worst, there could be a heck of a lot of puzzled borrowers trying to figure out why a number that would qualify them for the best rates and terms under one system (say, a 780) makes them credit mediocrities under the other.

The 'consistency' rap

The information in the credit-bureau databases can be wildly different. 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 erase the bogus entry.

One of FICO's big selling points for lenders has been 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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