VantageScore challenges FICO

Is VantageScore nipping at FICO’s heels? FICO’s main rival announced Tuesday that more than 6 billion VantageScores were used in the 12 months that ended June 30, compared with 3 billion the previous 12 months and only 1 billion the year before that.

FICO, based in San Jose, says about 10 billion FICO scores derived from consumer credit reports were used in the most recent year, but a spokeswoman said you can’t compare that to VantageScore’s 6 billion because all 10 billion FICO scores were used in lending decisions. The company could not say how many FICO scores were used for other reasons.

VantageScore said its 6 billion figure includes scores used in lending decisions as well as scores sold or given to consumers by banks, credit card companies and “freemium websites” such as Credit.com, CreditKarma, Credit Sesame and Quizzle.

Credit Karma, the largest of these sites, provides two VantageScore credit scores to its members as often as once a week, one based on their Equifax report, the other on their TransUnion report. Each time Credit Karma pulls its members’ credit scores, it pays for two Vantage scores, spokes-

woman Frances Cohen said. San Francisco’s Credit Karma announced Tuesday that is has more than 45 million members and has given away 1 billion free credit scores since its launch in 2008.

VantageScore could not break out how many of the 6 billion scores were used by lenders to make credit decisions but “certainly a large percentage were,” VantageScore spokesman Jeff Richardson said.

VantageScore was developed by the nation’s three credit reporting companies — Equifax, Experian and TransUnion. It is managed and marketed by VantageScore Solutions, which owns the intellectual property rights to the scoring models.

“FICO is still the 500pound gorilla” of credit scoring, said credit expert John Ulzheimer. But VantageScore “is an interesting success story to go from zero to 6 billion in less than a decade. Obviously they are a threat to FICO.”

Ulzheimer noted that Fannie Mae and Freddie Mac will only accept FICO scores on mortgage loans they guarantee. That was about half of all mortgages originated in the third quarter, according to Inside Mortgage Finance.

Historically, lenders that packaged various types of loans securities and sold them to investors have also demanded a FICO score on each loan. “That, and the Fannie-Freddie freezeout, have been a barrier to adoption” for VantageScore, Ulzheimer said.

But over the past year, “pools of loans originated using borrowers’ VantageScore credit scores were successfully rated by major ratings agencies and sold to secondary market institutional investors without any bias or penalty imposed due to the use of VantageScore,” the company said in a press release. The company called it a “significant achievement” that will pave the way for additional growth.

Those pools included personal and student loans securitized by Opportune and SoFi. The latter is a San Francisco marketplace lender.

SoFi spokeswoman Debra Jack said her company used both Vantage and FICO scores when it underwrote those loans. However, it no longer uses either score when people apply for a loan. Instead, it is using a proprietary model to evaluate borrowers.

FICO says that according to a TowerGroup study, FICO scores are used in 90 percent of lending decisions. Without knowing how many of those 6 billion VantageScores were by lenders, it’s hard to know if that is still true.

“The only thing you can conclude is that the market has been expanding and some lenders are using both,” Ulzheimer said.