Credit bureaus to alter scoring

Uniform system gives letter grades

Three major consumer credit reporting agencies yesterday unveiled a new way of calculating credit scores, introducing A through F letter grades designed to give consumers a better idea of where they stand.

The changes to credit scores, which lenders use to determine if they will make loans to customers and at what interest rates, mark a big shift in an industry that has come under increasing scrutiny from consumer advocates in recent years. The credit scores released by the three bureaus sometimes vary widely, depending on the information in their databases and the differences in how they analyzed it.

The credit bureaus -- Equifax Inc. of Atlanta, Experian Information Solutions Inc. of Costa Mesa, Calif., and TransUnion of Chicago -- yesterday said they plan to introduce a single procedure to calculate scores from the data they have collected, which they said will reduce the differences among the scores by 30 percent.

They also said the new system will be a much better predictor of consumers' likelihood to repay their loans. ''Subprime" customers -- those with a history of late payments, or those who are generally considered to be a higher risk -- and consumers with little credit history could benefit from the new model, said Chet Wiermanski, vice president of analytics for the TransUnion.

''In a traditional bureau score, anyone who's subprime is automatically categorized as a bad," he said. ''We're saying they're not all bad. We'll let the algorithms hone in on those circumstances."

The agencies in the past each used their own proprietary formulas to generate their own scores, meaning that a lender dealing with a consumer's application for a credit card or a mortgage might have to reconcile three widely different scores.

With the new system, a single methodology will be used to create the scores for all three credit bureaus, the agencies said.

Credit scores traditionally have been three-digit numbers that lenders used to evaluate the creditworthiness of borrowers. The scores reflect how much debt a consumer is carrying, if they pay back loans promptly and how many credit applications they have outstanding. Current scores range from 300 to 850, but the majority of scores fall within the 600s and 700s. The median score in the United States is 723, according to Fair Isaac Corp., which developed the scoring methodology used today by more than 70 percent of creditors.

The credit reporting agencies said in their disclosure that VantageScore ''will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply."

The new credit scores will be issued on a scale ranging from 501 to 990, with higher scores being better. To help consumers better understand the scores, they are also assigning them letter grades: A score between 901 and 990 is an A, 801 to 900 is a B, 701 to 800 is a C, 601 to 700 is a D, and 501 to 600 is an F.

''We think that the scaling is more logical for consumers to comprehend," said Wiermanski of TransUnion. ''You can think of it as an academic score: 850 is like a good, strong B. If your score is lower, you're more of a C level."

Consumer advocates expressed concern that the new scoring system would not correct the biggest problem in the industry: inaccurate information in consumers' credit file.

''That means it's a new recipe, but the same old ingredients," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. ''It doesn't address the underlying accuracy of the credit reports on which the scores are based."

The credit reporting agencies are introducing the new system, which they call ''VantageScore," to banks, mortgage lenders and credit card companies immediately. The new scores will be available to consumers after the lender rollout, probably later this year.

Lenders want an accurate, standardized way of measuring a customer's creditworthiness so they can determine whether to make loans. Bob Mahoney, vice chairman of New England banking for Citizens Financial Group, said the current situation can be confusing because banks sometimes get wildly different credit scores from the companies for the same customer, and it is hard to know which to trust. He said Citizens tends to pick the highest score because ''more often than not, we want to make the loans."

A more consistent score may help consumers as well. ''Maybe that consumer who was turned down for something may get something because the score is more accurate," said David Rubinger, an Equifax spokesman.

In considering consumer creditworthiness, lenders rely on the data compiled by the credit bureaus, though some large lenders rely on their own data. There are many different ways of crunching the data to compute credit scores. One of the most popular is Fair Isaac's ''FICO" score, which factors in a customer's payment history, the amount of debt owed, the length of a customer's credit history, and the types of credit used.

Some are betting that the new scoring system ultimately could trump FICO as banks' favorite. ''Over time, I think this will become the preferred score of the marketplace," said Donald Girard, a spokesman for Experian.

Shares of Fair Isaac fell $2.79, or 6.6 percent, to $39.37 yesterday, as investors speculated that a new alliance could hurt Fair Isaac's business.

Thomas G. Grudnowski, the chief executive of Fair Isaac, said that ''for the past 20 years, we've been both cooperating and competing with the credit bureaus . . . and that will continue." He added that it could take a long time to establish a competing system.

TransUnion has not decided whether to mail out the letter grades to consumers with their credit scores, or simply to make them available on its website, he said. Each credit reporting agency will decide that separately. The Experian spokesman, Girard, said the company has not decided whether to give the scores away for free or ask for a small fee, possibly around $5.

The high end of the new scoring system is higher than credit scores currently in use -- meaning that almost every consumer will see his or her credit score rise, though a higher score may not increase their chances of obtaining credit.

Executives at the credit agencies said the bureaus did not need to consult with federal regulators before developing their new scoring process. But a number of executives traveled to Washington, D.C., on Monday to brief bank, savings, and credit union regulators on the new process.

Sasha Talcott can be reached at stalcott@globe.com. Material from the Associated Press was used in this report.