Upcoming Changes to the Credit Industry: Part One
If political unrest, social conflict, and economic insecurities weren't enough, the upcoming changes to the credit industry can be the cherry on top of your already melting sundae.
Over the next three posts, we will be exploring the changes surrounding the credit industry. Specifically:
- - Credit Scoring
- - Consumer Privacy Rights
- - Credit Repair
In order to set the stage for the changing role of the credit bureaus, FICO, and the credit industry, we need to take a step back.
In 1958, a newly established FICO (Fair Isaac Corporation) started by William Fair and Earl Isaac, sent letters to the top 50 credit grantors, looking to pitch their new scoring model, and for good cause. Between 1958 and 1970, consumer demand for debt grew, and with it came the need to quickly identify the risk of a consumer. Due to the turmoil of unethical business practices and privacy violations of the ever-expanding credit bureaus, consumers and investors were looking for a change.
That change came in the form of the FCRA of 1970, which established privacy rights for consumers, and increased the accuracy of the credit reporting process. As the consumer lending market continued to grow, Wells Fargo implemented a FICO scoring algorithm in 1975 to help predict the credit risk of their growing client base.
Fast forward to 1989, when FICO introduces its first general-purpose credit score. Since this date, FICO has been on a roll. Not only does FICO have over 50 scoring models, but they have established themselves as the standard, touting that over 90% of lending decisions are made using a FICO credit score.
Enter Stage Left - The Vantage Score
In October of 2010, FICO filed a lawsuit against Experian and TransUnion over the marketing of their VantageScore as a "real" credit score. In August of 2011, The Vantage Score made its mark with a victory in court, and a huge blow to the idea that a FICO score is the only "real" credit score.
Since then, we've seen a dramatic change in consumer habits. There's a huge population of "credit invisible" consumers, with literally millions of millennials falling within that category. For those impacted by the great recession, a more common sense approach to rebuilding credit is in great demand. Situations that baffle normal consumers, like being punished for paying on your outstanding debt obligations, keep millions of people in collection debt and out of the home buying market.
The Vantage Score offers a lucrative option with the VantageScore 3.0. This new model markets that paying collections won't negatively impact your credit. In addition, utility payments and rental history factor into your credit score, making it attractive for banks looking to lend to "credit invisible" consumers. (The VantageScore 3.0 is supposedly used by over 2000 lenders, and 7 of the 10 largest banks). FICO, now in an increasingly competitive market, has introduced FICO 9 and FICO XD to compete with the Vantage Score.
As the competition between FICO and VantageScore escalated, the challenge to FICO was restricted to consumer based lending, leaving FICO untouched as the standard in mortgage lending.
The End of FICO's Reign?
The Credit Score Competition Act of 2015, introduced by Edward “Ed” Royce, is currently under committee review, and was designed to increase the competition of credit scoring models used by GSE's (Fannie and Freddie), ultimately loosening up the last stronghold for FICO to a popular VantageScore.
For now, FICO is still the standard for the mortgage industry. VantageScore continues to grow, and offers solutions to major problems such as "Credit Invisible" borrowers and the risk associated with stubborn millennial spending habits.
Could we see the decline of FICO's 60-year dominance of the credit scoring industry? Is there enough mistrust of the credit bureaus that allowing them the power to control credit scores is a conflict of interest?
What do you think is on the horizon for credit score, VantageScore, and FICO?