By AnnaMaria Andriotis
The credit score lenders use in the vast majority of decisions about who qualifies for credit cards and mortgages may be losing its meaning.
Though the FICO score has been the industry standard for decades, and is still a factor in 90% of loan approvals, the measure is slowly falling out of favor. Last week, we reported that the nation’s average FICO score barely budged since the recession. Some credit experts questioned the score’s ability to detect the worsening credit environment. Last week, a subsidiary of the National Association of Federal Credit Unions began recommending lenders in its network use VantageScore, an alternative to FICO.
Even bank and car loan lenders that continue to use FICO have begun to look at other scores too, experts say. “Some lenders have begun to change from FICO—they’re questioning [and] testing the differences between scores,” says Craig Focardi, a senior research director at CEB TowerGroup, a financial services research firm. And more lenders appear to be diversifying beyond FICO. “They’re saying let’s not put full trust in this—let’s back it up with other evidence,” says Martha Doran, professor emeritus of accounting at San Diego State University, who studies credit scores.
Some lenders developed their own credit scores. Lenders that provide jumbo and other private mortgages (which they keep on their books rather than sell to government agencies like Fannie Mae and Freddie Mac) use custom-scoring models, says Frank Donnelly, president of the Mortgage Bankers Association in Washington, D.C. These custom scores often include FICO in their calculations along with other assessments of risk chosen by the banks. Credit bureau Experian – which helped createdthe VantageScore — says that roughly 80% of large banks and lenders are relying on their own custom scores.
Despite these developments, FICO remains the most commonly used credit score among lenders. VantageScore, while growing slowly, is used in less than 10% of credit decisions, says Focardi. FICO accounts for the rest. “We continue to innovate to stay far ahead of our competition,” says Anthony Sprauve, a FICO spokesman. “We are confident that credit unions and other lenders will continue to rely upon FICO scores to make their most objective, accurate and profitable risk management decisions.”
But in the future, fewer lenders could be relying on any one score to determine how risky a borrower is, credit experts say. “A single score is no longer sufficient in terms of the best prediction you can get on a borrower,” says Barry Paperno, a credit expert at Credit.com, which tracks consumer credit issues, and a former manager at FICO.
Consumers may feel the impact. A high FICO score might not guarantee someone gets approved for a loan, or get the terms they want, as other measures may dredge up different information, says John Ulzheimer, president of consumer education at SmartCredit.com, and a former FICO manager. Similarly, consumers with mediocre FICO scores could end up in better terms with a lender than they expected if additional positive information is discovered through the lender’s independent credit research, he says.
This all comes as credit reporting firms are bracing for widespread changes. The Consumer Financial Protection Bureau this month announced plans to supervise the major credit reporting bureaus — such as Equifax, Experian and TransUnion — which compile the credit reports that determine consumers’ credit scores. The CFPB says the move is partly in response to consumer reporting errors on their credit reports, which are used to determine their credit scores.