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Use of Alternative FICO Credit Scores

Alternative FICO credit score

Should the use of Alternative FICO Credit Scores be allowed in determining whether a borrower is credit worthy or not?  Senators from both parties are pushing for a bill which aims to introduce the use of alternative credit scores.  Housing industry supports the bill and endorses it as well.  If the bill is passed it would mandate the Federal Housing Finance Agency to direct the government-sponsored enterprises to accept new credit scoring models, like the VantageScore model created by Equifax, Experian and TransUnion.  An outdated FICO model makes the argument for the bill reasonable.

Mel Watt, FHFA Director already said that the GSEs will not adopt the new scores until 2019 at the earliest, saying other issues must be resolved first.  Supporters of the bill stated that the FICO is grossly outdated and while it is outdated it still penalizes modern methods that would create a discrepancy with the model being used.

What is a FICO Credit Score?

FICO stands for  Fair, Isaac and Company.  This score was introduced in 1989 by FICO, then called Fair, Isaac, and Company.  Vast majority of banks and credit grantors uses the FICO credit score model.  This model is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion. Because a consumer’s credit file may contain different information at each of the bureaus, FICO scores can vary depending on which bureau provides the information to FICO to generate the score.

 

Why Push for New Credit Scores Rating?

Alternative FICO credit score

“The push for new credit scores is not really about competition or access to credit for low income households.  It is rather the corporate ambitions of the major consumer credit bureaus,” said Chris Whalen, chairman of Whalen Global Advisors.

Vantage Solutions, however, called this a false assumption.  The group said that it is impossible for competitors to share a monopoly.  Jeff Richardson, Sposkerperson of Vantage particularly called the statement as misguided.

Besides the monopoly risk, there is also the risk of data security.  Equifax who also has its own credit score VantageScore, had recently suffered from a very risky data breach.  More than 143 Million personal data had been leaked including passwords and credit card information.

How would allowing Fannie Mae and Freddie Mac to use alternative FICO credit scores help determine a better credit score for borrowers?  Would this really stifle competition between the credit bureaus and FICO?  What would be its effect on expanding access to credit?

Alternative FICO credit score

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Reference:  National Mortgage News

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