By Michelle Singletary
Sunday, March 19, 2006; F01

By now you may have heard that the three major credit bureaus have introduced a new scoring system they hope will someday replace the FICO credit score.

Equifax, Experian and TransUnion recently unveiled what they are calling the "VantageScore," a system designed to simplify the credit-risk scoring that helps determine what interest rate a consumer will pay.

Eventually, the companies would like credit grantors -- banks, credit card companies, auto dealers, mortgage lenders -- to stop using FICO scores, which are calculated using software developed by Fair Isaac Corp. and are the most widely used scoring model.

The three bureaus hold the financial histories of millions of people. The information in those files is used to create a credit score -- in the case of the FICO system, it runs from a low of 300 to a high of 850.

The credit bureaus say they've introduced their system so that the scores being reported to credit grantors will be consistent and easier to interpret. To understand what that means, you need to know that while we all get a score generated from each bureau, how those scores are determined can vary greatly.

That's because each bureau uses a different formula to generate the score it sells to lenders.

So let's say you're applying for a mortgage. The lender pulls all three of your credit scores from the three major credit bureaus. You have a 750 from one bureau, 700 from another and 675 from the third.

To reconcile the three scores, a mortgage lender will typically use the middle score of 700 to decide what kind of interest rate it will give you (other factors are also used, of course).

I recently conducted a workshop on credit. I asked the participants to pull their credit scores beforehand. One woman had a score in the low 800s from one bureau and a score in the 500 range from another.

Let's say this woman was shopping for a car and the dealer pulled her score only from the bureau that had assigned her the 500 score. That difference could cost her thousands of dollars over the life of her car loan if she took the financing the dealer was offering.

If another lender used the bureau that generated the score of 800, she would qualify for a better interest rate.

The VantageScore system uses a scale that ranges from a low of 501 to a high of 990. TransUnion said the bureaus' version of a three-digit score approximates the letter-grade system we're all familiar with from school. So a score of 901 to 990 would be the equivalent of an A, 801 to 900 a B, 701 to 800 a C, 601 to 700 a D and 501 to 600 an F.

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/ .

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail: singletarym@washpost.com .

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