VantageScore

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VantageScore is a consumer credit-scoring system in the United States, created through a joint venture of the three major credit bureaus (Equifax, Experian, and TransUnion). The model is managed and maintained by an independent company, VantageScore Solutions, LLC, that was formed in 2006 and is jointly owned by the three bureaus. [1] VantageScore models compete with the FICO score produced by Fair Isaac Corp. (FICO). [2] [3] Like the models developed by FICO, VantageScore models operate on data stored in the consumer credit files maintained by the three national credit bureaus. VantageScore models and FICO models use statistical analysis on those data to predict the likelihood a consumer will default on a loan. Both VantageScore and FICO models represent risk of loan default in the form of three-digit scores, with higher scores indicating lower risk, but VantageScore and FICO use different, proprietary analytical methods, and scores from one system cannot be translated into one from the other.

Contents

As of 2024, mortgage lenders use both FICO and VantageScore models, with a significant shift towards VantageScore due to recent regulatory changes. [4]

History and Development

Creation and Early Years

VantageScore was created in 2006 as a joint venture between the three major credit bureaus: Equifax, Experian, and TransUnion. The primary motivation behind its creation was to introduce a more consistent credit scoring model across all three bureaus, addressing inconsistencies that existed in earlier scoring systems. [5]

The development of VantageScore was also driven by a desire to:

Create a model that could adapt more quickly to changes in consumer credit behavior and economic conditions.

Growing Adoption and Recognition

Since its introduction, VantageScore has seen increasing adoption among lenders and financial institutions. Several factors have contributed to its growing popularity:

Market Share and Industry Impact

While exact market share figures are not publicly disclosed, industry reports suggest that VantageScore has made significant inroads in various sectors of the lending industry:

VantageScore vs FICO score

VantageScore and FICO are competitors, and FICO was not involved with the creation of VantageScore's formula. [7] VantageScore, FICO and the credit bureaus have allowed the public to know some information about the credit score categories and the corresponding calculation weights. FICO allows consumers to get their generic or classic FICO score for Experian, TransUnion, and Equifax through the myFICO website. Consumers can get their VantageScores from free credit report websites, and TransUnion and Experian offer VantageScores to consumers for a fee through their websites. [8] In contrast with FICO's credit scoring models, which are custom-built for each of the three national credit bureaus, to accommodate structural differences in the bureaus' databases, VantageScore model design allows a single model to operate on all three bureaus' data. [9] VantageScore Solutions holds several patents on processes that ensure pieces of data within each bureau's consumer database will be treated identically, regardless of differences in database structure. [10] [11] [12] [13] These methods eliminate much, but not all, discrepancy in VantageScore scores obtained at the same time from different credit bureaus. Some variation is unavoidable because factors such as the timing of lenders' payment-information reports can mean the contents of a given consumer's credit file will differ somewhat at each of the three credit bureaus. [9] Important differences between the VantageScore and FICO algorithms include:

FICO scores require having at least one account that has been open for six months or more and has been reported to the credit bureaus within the prior six months, whereas the VantageScore can be issued from just one month's credit history and with just one account reported within the prior two years. VantageScore thus captures consumers with little or thin credit histories; [14] tax liens are weighed less heavily in VantageScore® 4.0 than in FICO scores; [14] When a credit inquiry is made at one of the credit bureaus, it negatively impacts credit scores. Current versions of the FICO score treat multiple credit inquiries made within a 45-day period as if they were a single inquiry for scoring purposes (though some older versions of the FICO score restrict this to 14 days), but only if they are for the same type of loan. VantageScore counts multiple inquiries within a 14-day period as if they were a single inquiry, even if the inquiries are made for different types of loans. [14] The older FICO 8 score, which is still often used as of 2020, treated medical debt like any other unpaid debt for scoring purposes; medical debt has less impact than other unpaid debt in the newer FICO 9 score and VantageScore 3.0 and forward. [15]

For a comprehensive comparison of FICO scores and VantageScores, including how creditors use them, refer to this detailed analysis.

VantageScore Models

VantageScore has released several versions of its credit scoring model since its inception in 2006. Each new version aims to improve the model's predictive power and adapt to changing credit landscapes.

VantageScore 1.0 (2006)

The original VantageScore model, introduced in 2006, used a scale range of 501 to 990 and assigned letter grades to various score bands.

VantageScore 2.0 (2010)

Released in 2010, this version maintained the 501-990 scale and letter grade system of its predecessor. According to TransUnion, the letter grades corresponded to the following score ranges:

A: 900–990
B: 800–899
C: 700–799
D: 600–699
F: 501–599

VantageScore 3.0 (2013)

VantageScore 3.0, released in 2013, marked a significant change by adopting a scale of 300 to 850. [8] This change aligned VantageScore with the scale range used by FICO models, making it easier for consumers to understand and for lenders to implement. [16]

VantageScore 4.0 (2017)

VantageScore 4.0, released in mid-2017, introduced several significant updates: [17]

Reduced weight for medical accounts in collections compared to non-medical collection accounts. Exclusion of paid collection accounts from score calculation. Introduction of trended data analysis, examining a consumer's credit utilization rates over time rather than just the most recent billing cycle.

As of 2023, Synchrony Bank uses VantageScore 4.0 as the credit score for granting its credit cards. [18]

Adoption in Mortgage Lending

The Federal Housing Finance Agency (FHFA) has mandated that mortgage lenders use VantageScore 4.0 for mortgages sold to Fannie Mae and Freddie Mac, beginning in the third quarter of 2024. This includes all loans guaranteed by these Government Sponsored Enterprises (GSEs), which make up the majority of residential mortgages. [19] This significant shift is expected to increase the adoption and importance of VantageScore in the mortgage industry.

Future Developments

As the credit scoring landscape continues to evolve, VantageScore is likely to face both opportunities and challenges:

Increased competition with FICO, particularly in the mortgage lending sector. Potential for further incorporation of alternative data sources to enhance predictive power and inclusivity. Adaptation to changing consumer credit behaviors, particularly in light of economic shifts and technological advancements. Ongoing regulatory scrutiny and potential changes in credit reporting practices.

See also

Related Research Articles

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A credit bureau is a data collection agency that gathers account information from various creditors and provides that information to a consumer reporting agency in the United States, a credit reference agency in the United Kingdom, a credit reporting body in Australia, a credit information company (CIC) in India, a Special Accessing Entity in the Philippines, and also to private lenders. It is not the same as a credit rating agency.

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Credit scoring systems in the United States have garnered considerable criticism from various media outlets, consumer law organizations, government officials, debtors unions, and academics. Racial bias, discrimination against prospective employees, discrimination against medical and student debt holders, poor risk predictability, manipulation of credit scoring algorithms, inaccurate reports, and overall immorality are some of the concerns raised regarding the system. Danielle Citron and Frank Pasquale list three major flaws in the current credit-scoring system:

  1. Disparate impacts: The algorithms systematize biases that have been measured externally and are known to impact disadvantaged groups such as racial minorities and women. Because the algorithms are proprietary, they cannot be tested for built-in human bias.
  2. Arbitrary: Research shows that there is substantial variation in scoring based on audits. Responsible financial behavior can be penalized.
  3. Opacity: credit score technology is not transparent so consumers are unable to know why their credit scores are affected.

References

  1. ↑ "Why we were founded". Your VantageScore.
  2. ↑ Clements, Nick. "VantageScore Threatens FICO Credit Score Dominance". Forbes.
  3. ↑ "The FICO score is losing ground to a different credit score". finance.yahoo.com. 25 November 2015.
  4. ↑ Joeziel Vazquez (Sep 28, 2024). "Do Mortgage Lenders Use FICO or VantageScore: A Comprehensive Comparison". Credlocity.
  5. ↑ "About VantageScore Solutions". VantageScore Solutions. Retrieved 2023-09-28.
  6. ↑ "FHA to start approving mortgages with alternative credit scoring models". HousingWire. 2019-04-18. Retrieved 2023-09-28.
  7. ↑ "Fair Isaac's Reply to the VantageScore, From a FI Employee". Credit InfoCenter Forums. 6 April 2006.
  8. 1 2 "Personal Credit Rating Reports at Experian.com". www.experian.com. 31 March 2023.
  9. 1 2 "Why it's more consistent". VantageScore Solutions.
  10. ↑ "US Patent for Methods and systems for characteristic leveling Patent (Patent # 7,801,812 issued September 21, 2010)". Justia Patents Search.
  11. ↑ "US Patent for Methods and systems for multi-credit reporting agency data modeling Patent (Patent # 7,930,242 issued April 19, 2011)". Justia Patents Search.
  12. ↑ "US Patent for Methods and systems for characteristic leveling Patent (Patent # 7,974,919 issued July 5, 2011)". Justia Patents Search.
  13. ↑ "US Patent for Methods and systems for score consistency Patent (Patent # 8,055,579 issued November 8, 2011)". Justia Patents Search.
  14. 1 2 3 Brozic, Jennifer (September 1, 2021). "VantageScore vs. FICO: What's the difference?". Credit Karma . Retrieved 6 July 2022.
  15. ↑ "Does Medical Debt Affect Your Credit?". CreditRepairCompanies. April 7, 2020. Retrieved 6 July 2022.
  16. ↑ "Why it's easy to implement". VantageScore Solutions.
  17. ↑ "Introducing VantageScore 4.0". Your VantageScore.
  18. ↑ https://synchronybank.com/blog/credit-scores-101/. Retrieved 13 December 2023.
  19. ↑ "FHFA Announces Validation of FICO 10T and VantageScore 4.0 for Use by Fannie Mae and Freddie Mac". Federal Housing Finance Agency. 2022-10-24. Retrieved 2023-09-28.
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