Let the Games Begin: The Big 3 introduce their FICO fighter called Vantage Score

Let the Games Begin:

The Big 3 introduce their FICO fighter called Vantage Score

     In March 2006 the three major credit bureaus announced a joint venture between them that will compete directly with Fair Isaac in the area of Credit Scoring Software.  The three major credit bureaus have formed a new company called “Vantage Score Solutions, LLC” that will directly compete with Credit Scoring Giant “Fair Isaac”. This new credit score will be 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 score when using Fair Isaac’s Classic credit scoring model that is currently the industry standard in the mortgage industry. 

     Vantage Score will be independently marketed and sold separately through each of the three national 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, the Credit Bureaus want to keep the profit potential separate to a degree by being able to market the score separately.  Basically, the company that sells the most “score pulls” will make the most money from the new score 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 top and low ends are slightly higher than FICO scores currently in use and will be grouped in “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 it currently is under Fair Isaac’s Classic FICO model that ranges from 300 to 850.  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 model from Fair Isaac in that it:

• Predicts the likelihood of future serious delinquencies (90 days late or greater) on any type of account
• Is based on statistics from a 24-month performance period
• Includes up to four reason codes ( 5 if inquiries were a significant factor in the consumer not scoring higher; as required by FACTA )
• Can be accessed from all three credit reporting companies

Vantage Score is different from the Classic FICO score, in that:

• 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.
• Vantage Score will return credit scores on consumers with limited credit histories more so than the Classic FICO model that may return a zero if the credit file is too thin or lacks recent activity..

Let’s cut to the Chase! Shall we?

     While Fair Isaac’s Classic FICO 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 (five 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 is of zero relevance if they have a sub par method of analyzing those 15 million reports.  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 version of Fair Isaac as the industry 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 been able to win the blessing of Fannie and Freddie even though it is better at predicting whether the consumer will go 90 days late or not in the next 24 months than Fair Isaac’s own Classic model is.  Why?  Because change is not easy.  There are hundreds of tri-merge companies that have the Classic FICO model built into their system and changing the software takes time and is not easy.  Fannie and Freddie also do not want to deal with the transition problems where some resellers will still have the Classic model ranging from 300 to 850 and others using Next Gen with a range of 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 have been buying out the resellers    ( the little credit bureaus) by the dozens in order to monopolize the reseller market.  For clarification purposes, I am referring to companies that provide three credit reports as “Tri-Merge” Companies, while the Resellers are what used to be considered satellite offices for the credit bureaus and actually functioned as a credit bureau on a smaller level and were more tied into the bureaus than the tri-merge companies we all know today.  Tri-merge Companies are resellers to some degree but for purposes of clarification we will simply refer to them as tri-merge companies in this article.

     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 had 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 can only have to deal with a few players in order to forward their agenda more smoothly.  If the bureaus scratch the backs of the key players in the Tri-merge market, they will not only make it easy to call on favors as they arise, but will also only have to deal with implementing their new Vantage Score into a dozen or so systems once they get the green light from Fannie and Freddie. It won’t be as hard to convince Fannie and Freddie to give the thumbs up to the scoring model change since the bulk of the implementation tasks fall on the Tri-merge companies in implementing into the tri-merge format the new score. 

Sorry Fair Isaac, You Lose!

     What do you think the Bureaus will do next?  Start calling in their favors owed to them by the Tri-merge companies.  Even if Fair Isaac offers their credit score to the tri-merge company at half the price of the Vantage Score, the big three can still push them out of business because the Tri-merge company can charge ten times the price they paid for the Fair Isaac scores since they name the price.  The bureaus can also use pricing breaks to push the Tri-merge companies in the direction they want them to go.  Do what I say or I increase the price you pay 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 FICO’s Classic 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, because Fannie and Freddie will want conclusive proof that the Vantage Score is not going to cause the lending industry to lose money before they consider giving a stamp of approval.  Each individual lender also needs to be convinced before they risk giving a million dollar mortgage to someone when they are not sure if the associated risk prediction is accurate or not.  Additionally, lenders have created extensive lending guidelines around the present scoring model.  Fair Isaac also has lots of goodwill built on the accuracy of their data and the chance to save a few dollars on a credit score is not going to be considered unless they are certain the data is reliable.  This does not happen overnight ( even if you are the big three credit bureaus) and will take extensive case studies that compare the results of Fair Isaac’s scoring model to those of Vantage’s.  I would guess it would be at least two or more years before Vantage has a chance at winning 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.