Living with credit

VantageScore and FICO reinvent alternative credit scores: But will lenders use them?

Kelly Dilworth

They’re at it again.

It’s been almost nine years since credit scoring giant FICO debuted its FICO Expansion Score, which uses a wide range of alternative data, such as telephone, utility and club membership records, to help score people with thin credit histories.

Now, less than nine months after teaming up with CoreLogic on a similar type of credit score, FICO is partnering with yet another consumer reporting company, FactorTrust, on an alternative data-based project that will again attempt to give scores to the traditionally unscorable.alternative credit scores

FICO says its latest partnership will allow lenders to connect with a potentially lucrative pool of borrowers who are good with money, but inexperienced with credit.

“Lenders can now make better credit decisions on people who don’t have a credit history, and who have therefore found it hard to obtain credit,” said FICO’s Andrew Jennings in a March 11 press release.

But will more lenders — many of whom still rely on the plain-Jane, credit-based FICO score — actually use it?

When you think back on recent history, it’s hard to be optimistic. Consider, for example, what happened to my brother-in-law, a research scientist in Texas who didn’t apply for his first credit card until he was 29.

If the credit card issuer that he applied for a card with had used one of the alternative credit scores that were available at the time, the issuer might have seen that my brother-in-law was just the kind of ideal, bill-paying customer that lenders say they want.

Instead, he was rejected on the first try and had to go directly to his bank, which, based upon its own internal information about him, quickly offered him a low-rate card. Which goes to show that when it comes to extending credit to those without a solid traditional credit history, many lenders have not quite embraced new ways to identify creditworthy borrowers.

That hasn’t stopped data companies from trying.

The same day that FICO announced its latest pairing with an alternative data company, VantageScore (FICO’s closest competitor), announced it was launching a fresh update to its flagship credit score that will also be based, in part, on alternative data sources.

Dubbed the VantageScore 3.0, the new score eschews the company’s idiosyncratic credit scoring range of 501 to 990 in favor of the more common range of 300 to 850. It also factors in a range of nontraditional data, such as rental, phone and utility payments, public records information and whether or not you were a victim of a natural disaster.

The score’s debut made a big splash when it was announced last week. Business Insider called it “the new credit score everyone is talking about,” while CNN Money welcomed it with the optimistic headline: “New credit score could help millions.”

Reading those reports, you’d think that incorporating nontraditional data is something new.

What many of the articles from last week fail to mention is: These types of scores have not only been around for years; they have long struggled to gain a foothold with lenders, many of whom aren’t yet sure they can trust that kind of data.

“To me, the primary stumbling block is the information collection,” said Dave Bowen, senior vice president at KeyBank, in an interview conducted earlier this year for a story I wrote about alternative credit reporting.

Unlike banks that consistently report borrowers’ payment histories to credit bureaus, landlords, utility companies and cellphone providers are under no obligation to do so. (Usually, when that information does show up on a credit report, it’s because the companies sold a customer’s debt to a collection agency.)

VantageScore doesn’t explain how they’ll get around that particular hiccup (they do, at least, acknowledge they’ll only use it if it’s available).
However, like FICO, it’s optimistic that its updated scoring algorithm could bring millions more consumers into the credit-carrying fold — especially now that lenders are expressing growing interest in using, or at least testing, alternative data.

VantageScore’s decision to incorporate nontraditional data into its flagship credit score — rather than offer it as a supplement — could help them meet that goal.
However, first it will have to convince lenders that actually buying VantageScore 3.0, rather than just sticking with the old VantageScore, is worth it, which is no easy task. Just ask FICO.

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  • Credit Score Canada

    Interesting. I always thought the current scoring system was sufficient in helping creditors assess their clients. I’m not sure how much more information we want. A score is really worth nothing if you can’t compare it to the population as a whole. So i’m not sure if incorporating nontraditional data will make much of a difference. -Pat of Credit Score Canada