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1/06/2007

FICO vs. FAKO

Today I came across a post a Make Love, Not Debt entitled FICO and the Mortgage Catch-22.

I just got my credit score, which is based on the new Vantage Score model. My current score is 725 on a scale of 501-990. According to the credit score analysis, one of the primary reasons my score is so low is that I "have no real estate accounts."

More info on the Vantage Score

A few months ago, Casey Serin of I Am Facing Foreclosure committed the same mistake, pulling his TrueCredit score instead of his actual FICO. (See comments on the first link for people criticizing his choice of credit score and telling him to get his real FICO.)

What's the problem? A credit score is a credit score, right? Well, yeah, but not the REAL credit score. There is The One True Credit Score -- FICO -- and then there's a bunch of pretenders (at least in the US). According to Wikipedia, the Vantage score is up-and-coming and may start to replace FICO. This looks like a bunch of politicking to me. The Vantage score is backed by all 3 credit reporting agencies, which is a plus for it, but it looks like they basically came up with it in order to avoid paying royalties to Fair Isaac. When I see a bank pull my Vantage score, I'll start believing in it, but for now it just looks like a power play by the credit agencies. Even if it receives a lot of promotion by the credit agencies, it will take years for it to achieve any real market penetration -- lenders are already comfortable with the FICO, and switching to another system will require a long period of recalibration.

So while Vantage and TrueCredit are "actual credit scores" that obviously take into account much of the same information that FICO takes into account, the scoring process is different and the final score will be very different. Vantage goes from 500 to 990 -- almost the same range as FICO (covering about 500 points) but bumped up about 150 points on both ends. This is probably a psychological boost to people who have a poor credit score, but it makes for confusion because you can't compare it apples-to-apples with the FICO, which is what everybody means when they talk about their credit score. It is easy to see the psychology at work; nobody wants a credit score (or SAT score, for that matter!) of 0, so all of them start at a few hundred points and go up from there. But these are all just numbers games. You could have a "TrueVantage Extreme Plus Credit Score" of 90 gazillion, but it wouldn't mean anything.

As a side note: based on MLND's post about her Vantage score, it appears that there is at least one significant difference between the FICO and the Vantage: the inclusion of mortgage debt, specifically, as a positive predictor of credit-worthiness. FICO does look at the types of loans you have (which I will look at very soon as Part IV of the Intro to Credit Gaming series), but that is mainly a revolving vs. installment debt calculation. It is kind of hard for me to believe that this mortgage component will play a big role in the Vantage score. Of course, a credit score is just a "best guess" prediction at how credit-worthy a person is; it considers a limited-yet-potentially-large set of information and distills it to a single number. Such a process is always fraught with peril, and always needs tweaking from time to time to match trends. Insurance companies have years and years worth of data that they sift through in order to determine how much to charge you for insurance. This is the same thing that lenders do, based upon your credit score (at the moment, almost exclusively the FICO score). Having a mortgage loan really doesn't seem like it could be that great of a predictor. I understand the knee-jerk "but if you own a home, you must be stable!" argument, but on the other hand, if you lose your job and run low on cash, you are going to keep paying your secured debt (i.e. your mortgage) and let your unsecured debt (credit cards, etc.) fall to the side. Credit card companies can't repossess your credit-purchased belongings! Therefore, in an app for a credit card or other unsecured line of credit, having a mortgage should logically LOWER your credit score. Not by much, mind you, but a bit. Anyway, enough of this speculation.

For the moment, the one and only credit score that matters is the FICO, unless your lender tells you otherwise. If you pull your credit score, you need to get the FICO. I have read good things about MyFICO.com but have not used it. I think they may be somewhat overpriced, but at least they are not pulling the wool over your eyes with a "FAKO" score. I get my credit score (FICO based on TransUnion) for free through my Washington Mutual credit card. I'm working on that post right now, and I will post it this week.

5 comments:

G.C. said...

As far as Myfico.com, it's basically the only game in town. It's the only place to get all the FICOs, so there is no way to say if it's overpriced or not. It's the only price.

However, there are MANY 20% off codes floating around. You could also be an affiliate and get commission as well as discount codes to reduce the cost firther.

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Anonymous said...

about 10 years ago the credit bureaus found a great new revenue stream...selling credit scores to consumers...today that revenue stream constitutes a very large % of total revenues to all three bureaus and it's been a life-altering windfall for them all...the Vantage score leads consumers to believe that their credit is much worse than it is and as a result likely drives those consumers to buy products and services from the bureaus who provide the Vantage score to improve their score thus generating even more revenue for the credit bureaus....so...the likely scenario is that the bureaus never intended the Vantage score to be adopted for use by lenders, but rather intended it as a "leverage point" for consumer revenue...call me crazy but I've worked in and around the credit industry for 25+ years and that's the scenario that makes the most sense because if FICO say's you're and A- and Vantage says you're a C-, that's the only scenario that makes sense...and it's HUGE $$ for the credit bureaus who had seen their revenues capped as they provided credit reporting services to every credit grantor in the US over a decade ago and so their business couldn't grow...do the math...and ignore your Vantage score...FICO is the one that matters