FICO Credit Scores Lose Some Legitimacy, Thanks to Court Decision

Before you go, we thought you'd like these...
You may not realize it, but when you buy a score from one of the three credit bureaus you could be buying a VantageScore rather than a FICO score. Why does it matter? Mortgage lenders likely are using the FICO score, so what you just paid for won't give you the information you need.

A FICO score, named for the Fair Isaac Company that provides it, is based on a range of 300 to 850. A number from VantageScore Solutions is based on a range of 501-990, which tends to make you look like you have a higher score than the lender will see.

FICO wants to stop VantageScore Solutions from using any numbers that overlap the 300 to 850 range, which would leave VantageScore just 0 to 299 or 851 to 999. Neither range would allow enough room to create a valid scoring system.

VantageScore got what it wanted last week when U.S. District Judge Ann Montgomery denied a new trial after a jury determined that one could not trademark a score range. If her ruling stands, FICO likely will no longer have a trademarked range and consumers will have even less understanding of what they are buying.

"Only the credit score your lender uses is what matters," said Odysseus Papadimitriou, CEO of Cardhub.com, a card comparison website. Right now, he said, there is a lot of "confusion about whether they are getting a score that the lenders use."

The court decision will only add to the confusion.
FICO wants to stop VantageScore Solutions from building market share. VantageScore Solutions says that four of the top five lending institutions and eight of the top 25 financial institutions are using VantageScore. VantageScore is owned by the three credit reporting agencies -- Equifax, Experian and TransUnion.

LowCards.com CEO Bill Hardekopf said, "The FICO score is still the standard, but we think the VantageScore will continue to eat into their market share -- especially if they win the lawsuit and the mortgage companies become more confident in their model, and that they will be around for the longterm and not stamped out by this lawsuit."

Your FICO score right now can have a big impact on what interest rate you'll pay and ultimately how much that credit is going to cost you over the life of the loan. VantageScore Solutions CEO Barrett Burns told me by telephone that he believes "choice is important" for lenders. By offering a choice, he says, it will "encourage competition and innovation."

He called FICO's trademark claims "meritless" and said "at every step, VantageScore has prevailed against Fair Isaac's claims." He believes Vantage Score will prevail if FICO appeals.

But don't expect FICO to give in. Craig Watts told me by e-mail that FICO plans to appeal Judge Montgomery's order. He added that "consumers will continue to be victims of big-budget ad campaigns that trick them into buying knock-off scores that they think are the genuine FICO scores lenders use to make decisions."

He added that "three-fourths of all U.S. residential mortgage originations are decided using FICO scores." He said this refers to loan decisions, not quantity of lenders.

He also said that about 4 billion FICO scores are calculated using scoring models at Equifax, Experian and TransUnion. "There is no 'near-beer' FICO score. When a consumer buys a FICO score, it is always the same score that most lenders use."

Yet that may not be the case for long. FICO introduced a new score for mortgage lenders called the "BEACON Mortgage Score." Mortgage lenders are testing out its predictability and are waiting for a final ruling from Fannie Mae and Freddie Mac about whether or not to use it in underwriting.

Today, you can't buy that BEACON score and whether or not it will be available in the future is not known.

In addition to the BEACON score, some industries, such as auto lenders and credit card issuers, have customized models at FICO. While these models are similar to the general-risk FICO score, they look at industry-specific risks. For example, the auto industry wants to test the risk that someone may not pay back an auto loan.

For now, if you really want to know what credit score your mortgage lender will see, your safest bet is buying the FICO score. But you also can get one that will be pretty close to FICO for free at CreditKarma.com.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score.
Read Full Story

Find a Home

Buy
Rent
Value
Powered by Zillow

People are Reading