What is your credit score? That may be hard to answer because none of us has only one. You likely have a dozen or more, all created in the pursuit of the same objective. So how did consumers come to think that one credit score – FICO – is the sole reflection of their ability to repay a loan?
Following decades of growing consumer spending after World War II and associated data collection on their buying and other unrelated habits, in 1970, the Fair Credit Reporting Act required credit bureaus to open their files. The intent was to protect consumers from lenders using misinformation against them. The law required unrelated data to be deleted and allowed consumers to review the data for errors. While consumers utilized credit more and more for their purchasing decisions, the credit bureaus struggled to find an industry-standard credit score that lenders could apply consistently.
Enter Fair Isaac Corp in the late 1980s, developing the FICO credit scoring model. Using data from the credit bureaus, their proprietary models applied an associated weight to each input to calculate the score. Despite having disclosed a general outline of the information used, the fine points of its methodology are still shrouded in mystery and are subject to change at its discretion.
One reason for multiple credit scores is a lack of data integrity and consistency. Lenders share their data with credit bureaus, but not equally. One bureau may show a collection account where another does not. The bureaus are competitors, and they don’t share data. And credit bureaus and financial institutions make reporting mistakes. As the source of data for any credit model, these data differences drive different credit scores.
With little competition, Fair Isaac enjoyed a near-lock on the sale of credit scores. By 2006, to reduce costs related to purchasing FICO scores, the three largest credit bureaus combined to develop and introduce their alternative credit scoring model, VantageScore. Shortly afterward, Fair Isaac filed suit against VantageScore, but a judge dismissed the lawsuit. It can be hard to discern the current market share because lenders often rely on both sources depending on the purpose, but the FICO score remains dominant. Nevertheless, in 2020, the Justice Department opened an antitrust investigation into Fair Isaac Corp, following years of complaints about their dominance and amid efforts by financial regulators to inject more competition into the credit score market.
The pandemic changed an evolving credit scoring landscape further still. The Wall Street Journal recently reported that FICO scores are becoming a smaller factor in underwriting decisions. Instead, many banks and other lenders have begun using internally generated scores based on the growing wealth of new data available to predict who will pay and who won’t. Currently, there are no requirements to share these scores with consumers.
Creating internal scores saves on fees for external scores. More importantly, it also allows for faster responsiveness as conditions change and the ability to assess borrowers with brief or non-existent credit histories. For example, FICO scores don’t reflect deferment and forbearance programs, making it harder for lenders to evaluate borrowers incorporating such factors. Also, more than 50 million Americans lack a FICO score because they have thin or non-existent borrowing histories.
For consumers, the rules haven’t changed. Higher scores are better. Using credit responsibly will lead to higher scores, regardless of which credit scoring model you employ. Review your credit report with the three largest credit bureaus: Experian, TransUnion, and Equifax. You are entitled to a free copy of your credit report every twelve months by visiting www.annualcreditreport.com. Ensuring your credit files are complete and accurate will reduce the risk of divergent credit scores negatively impacting your creditworthiness.