The FICO score has been the dominant marker of creditworthiness ever since it came on the scene a quarter century ago. Today, some 10 billion FICO scores are sold each year to lenders looking to vet potential customers for new credit, according to parent company Fair Isaac Corporation (FICO).
But the FICO score is slowly losing ground to its closest competitor — the VantageScore. The VantageScore, launched in 2007, was the result of a joint effort by the three major credit bureaus (Experian, TransUnion and Equifax) to create an alternative to the traditional FICO score. FICO dragged the VantageScore maker to court in an effort to stop it from using its signature 300-850 credit score range, but the company lost the suit in 2010. VantageScore has been gaining ground ever since.
Over the last year, six billion VantageScores were used in the U.S., according to an independent study commissioned by parent company VantageScore Solutions, LLC. That’s double the number of VantageScores used a year prior and a six-fold increase since 2012.
“We are seeing tremendous growth in many consumer lending categories, and bypassing the six billion scores used marks a major milestone for the VantageScore model,” said Barrett Burns, president and CEO of VantageScore Solutions.
The VantageScore is used by 2,000 lenders, including seven of the top 10 largest financial institutions in the U.S., according to company spokesman Jeff Richardson. FICO says its score is used by 90 of the top 100 largest financial institutions. Despite this growth, VantageScore is still the new kid on the block. And Richardson could not say based on the study how many of those six billion scores were used by lenders in deciding to issue new credit and how many were delivered to consumers through credit issuers or through free credit-monitoring services like CreditKarma, Credit Sesame and Quizzle.
FICO, on the other hand, bases its 10-billion-score figure solely on scores used by lenders to make decisions about issuing new credit, says FICO spokeswoman Christina Goethe. For that reason, comparing the two scores is “not apples to apples,” she says. FICO scores are still used in over 90% of lending decisions.
David v. Goliath
VantageScore may be gaining ground on FICO, but FICO certainly isn’t going anywhere.
FICO’s core business is the sale of its credit scoring models to the major credit bureaus, which in turn use their own customer data to create a FICO score and sell that score to lenders. So long as lenders are willing to pay for FICO scores, don’t expect credit bureaus to stop selling them. FICO generated $207 million in revenue from the sale of FICO scores in 2015, up from $186 million in 2014.
“This battle in my mind is not unlike the Microsoft vs. Apple battle, where you have one dominant player but the second player is chipping away at its market share,” says credit expert John Ulzheimer. “To be No. 2 in the world of credit scoring is not bad.”
What’s likely to become common is that lenders will use a dual score strategy, vetting customers based on both a VantageScore and a FICO score, Ulzheimer says: “Lenders will say, based on the intersection of a person’s scores, we believe their risk to be this and we’re going to offer them that.”
The real battle is which of the dueling scoring models will find the best way to offer scores to Americans who do not have a credit score — the 26 million people who are considered “credit invisible” by financial regulators today. Some people simply don’t have enough credit history to create a credit file and others may have too many past delinquencies on their report.
VantageScore 3, released in 2013, ignores any collections accounts with zero balances and reduces the penalty for people with past due medical debts. FICO answered this challenge by releasing FICO 9 last fall, a new score that also ignores $0 balance debt collections and reduces the impact of past-due medical debts on its score. Still, more people are "scoreable" under the VantageScore model, says Ulzheimer.
FICO got a major leg up on VantageScore in October when it announced a new pilot program for the FICO XD score. The score is based on alternative scoring data like cellphone and utility payment history (which are not factored in the regular FICO score). So far, 12 major credit lenders are testing the score.
Much of the advice around what makes for a healthy credit score is based on FICO’s scoring model. As the VantageScore becomes more widely used, it’s helpful to understand what factors can influence both scores. You can find a detailed breakdown of how credit behaviors impact the VantageScore here and the FICO score here, but you won’t find many differences.
Both scores put a lot of weight on payment history and credit utilization (how close you are to maxing out your available credit limit). Making on-time payments is undoubtedly the best way to improve either score, right behind using less than 30% of your total available credit (ex: if you’ve got 3 credit cards with a combined limit of $10,000, you want to make sure you’re not carrying more than $3,000 on them at a time).
Although each company’s scoring model is different, if you were to put your FICO score and your VantageScore side by side, they will likely vary but not by much. “If you have a good credit score or a bad credit score, you will have a good score or a bad score regardless of the brand,” Ulzheimer says.