Still Garbage In, Credit Score Out

With VantageScore, all three credit bureaus would still generate scoring using information from a consumer's credit file. But the formula used to determine a score would be the same, thus eliminating part of the reason scores can vary so much, according to the agencies.

"We wanted to take away a certain degree of variability," said David Rubinger, a spokesman for Equifax.

That claim sounds reasonable, except there's one huge problem. The scores under the new system could still cause a Grand Canyon-like spread.

Rather than creating a new credit scoring system, the bureaus should focus on fixing a problem that troubles many consumers and consumer advocates. Here's the problem: If any of your credit reports has incorrect information, is missing critical information or if some data aren't even being reported to one of the agencies, this can reduce your score no matter what the scoring formula.

"There is still a huge problem with the data being reported to the agencies," says Evan Hendricks, editor and publisher of Privacy Times newsletter and author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."

Hendricks is particularly outraged that some credit card companies refuse to report the credit limits for their consumers.

How important is that fact?

Let's say you have a credit card with a limit of $10,000. You have an outstanding balance of $2,500, and that's the highest balance you've ever had on that particular card. But as a policy, the credit card company doesn't report your credit limit. In the credit-scoring formula, your highest balance of $2,500 could be substituted for your maximum credit limit. That in turn could make it appear that you are maxed out on that card.

Maxing out on your credit limit can significantly lower your credit score because the amount you owe (or your credit utilization rate) accounts for 30 percent of your score in the FICO formula. While the credit bureaus haven't disclosed how they will rate credit utilization under VantageScore, it's likely to be similar to the FICO model.

The credit bureaus and the government should make sure the data being reported to the bureaus are as accurate as possible. Right now there is no large-scale, independent auditing to determine how accurate credit reports are.

"There is no need for a new system," said Richard F. LeFebvre, president of AAA Credit, who has worked in the credit-reporting industry for 15 years. "There are four variations just within the mortgage arena alone, with different models, varied depending on the creditor. Your model is only as good as the underlying data."

Researcher Tara S. Prasad contributed to this column.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online at http://www.npr.org/ .

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