By David Lord
Did you know you have multiple credit scores, and that for all the work you have done to build your FICO score there are actually many other factors that can affect loan approval?
FICO — the Fair Isaac Corporation, which calculates consumer’s credit — has essentially operated unopposed for decades. FICO scores have become synonyms with credit reports and 90% of loan decisions depend on this numeric assessment of borrower viability.
However, in 2006, the three major credit reporting agencies — Equifax, TransUnion and Experian — developed their own credit reporting algorithm, VantageScore. VantageScore was developed in an effort to compete with FICO, but has yet to harness the same control in the credit reporting market.
VantageScore is similar to FICO because it uses statistical analysis to predict the likelihood a borrower will default on a loan. Like FICO, the viability of a borrower’s potential is represented by a number between 350 and 800. However VantageScore uses a proprietary algorithm that favors those with little credit history.
Unlike FICO, VantageScore considers recurring payments such as phone bills, utilities, etc. and takes into account 24 months of activity rather than the six-month period of FICO scoring. For this reason, VantageScore can be an advantageous score for those with little or no established credit history.
While VantageScore is used by around 3,000 lenders, it still has a way to go before usurping FICO control. However, this could change in light of potential Federal Housing Financing Agency reform. The regulatory agency is considering changing credit score requirements and potentially transitioning to VantageScore instead of, or in addition to, FICO. If this is the case, there could be significant changes in the way people secure new homes.
A 2015 Consumer Financial Protection Bureau report found that nearly 45 million Americans lack any significant credit history. As a result, a major portion of the American demographic is barred from mortgage approval which not only prevents millions from achieving their dreams but also inhibits housing market growth.
Inclusion of VantageScore for credit checks would inject a huge sum of money into the housing market, which would normally go to rent payments. An invigorated housing market would benefit new owners, current owners and future owners — a win/win/win for all involved.
The government-controlled agencies Freddie Mac and Fannie Mae, which guarantees U.S. mortgages, have almost always required lenders to use FICO scores to determine prospective borrowers’ creditworthiness. This means consumers have been pigeonholed to one, single way of building their credit history. The only way to satisfy the standards of FICO, and build credit under this model, has been to follow a pre-established and static path of borrowing.
If VantageScore were to be considered for mortgage approval, Americans would have greater consumer freedom — possibly rerouting the journey to homeownership entirely. An alternative credit reporting method would allow mortgage approval for a whole new crop of borrowers that did not follow a traditional financial path.
This is an exciting prospect because it means a previously unconsidered group can now potentially secure a loan. More often than not, opening up markets and promoting consumer flexibility is a favorable prospect for the U.S. economy and individual prosperity.
One of the most prominent advantages of VantageScore for many Americans is that paid collections are completely disregarded. Under FICO, if you happen to be in collections for delinquent bills, but then pay the outstanding amount, your credit report is still negatively marked for many years. This is a tricky situation for many people that experienced temporary financial hardship because they continue to be punished for collections despite paying off those accounts.
VantageScore takes a different approach to collections — there is no harm done if collections are paid. This is a huge advantage for newly prosperous individuals because they can be approved for a mortgage unfettered by past mistakes.
When a single entity controls an entire market, consumers sacrifice free market agency. This is not to say FICO exercises any sort of tyrannical control, but it could certainly be a positive thing for consumers to have more options. As stated above, mortgage approval will usually come down to your FICO score, so an alternative would improve many people’s opportunity to get a home.
VantageScore is currently being used for some auto loans, credit cards and mortgages. Wider acceptance — brought on by sweeping federal adoption — would have vast-reaching implications on the housing market and individuals alike.
Today, when you apply for credit, you don’t get to choose if your FICO or VantageScore is used. For this reason it’s important to monitor all financial factors and repair credit as needed.
In light of further acceptance of VantageScore your job as a consumer has gotten a little harder. Most people know it’s a good idea to check FICO scores before applying for mortgages, but that’s simply not enough these days.