Why Don’t We Have a Universal Credit-scoring System?

A credit score is a three-digit number that can help decide the fate of your financial well-being in Missouri. To make things more exciting and complicated, you have more than one score to worry about. You probably have dozens of credit scores, and you might never find out most of them.

If you do your research before choosing a car insurance policy or loaning money to purchase blown-in insulation in Kansas City, you will likely learn about three credit scores. The major credit bureaus generate them: Experian, TransUnion, and Equifax, and they can differ from one another to some extent.

So, why do you have several credit scores in the first place? The answer is because the financial services industry does not have a universal credit scoring model. Below are the reasons why this is the case.

Models Are Imperfect

The first general-purpose credit scoring system was rolled out by Fair Isaac Corporation (FICO) in 1989. It was a game-changer, for financial institutions use their system to assess consumer risk before it was introduced.

The advent of the FICO scorecard eliminated the need for depending heavily on the ability of human loan officers to calculate risk when doing business with a particular person. It allowed credit card issuers, insurers, and lenders to use a more reliable tool to judge the creditworthiness of consumers.

However, the FICO credit scoring model is far from perfect. It has undergone countless improvements to fine-tune the accuracy of its algorithm. Even then, not a single version of its system promoted financial inclusion to all. To this day, FICO credit scoring models arguably alienate millions of thin-file consumers.

man checking credit score

Data Furnishers Act Independently

The lack of a universal credit scoring system in the United States also stems from the fact that merchants and creditors are not required to report consumer data to credit bureaus. They can choose to keep the information of their customers to themselves, which results in incomplete credit reports.

The growing ubiquity of fintech solutions promises to incorporate alternative financial data sets into the calculation of credit scores. But then again, technology is useful only when adopted. It takes two to innovate, and the status quo does not change unless all parties decide to help one another to paint the full picture of every consumer’s creditworthiness.

Lender Needs Are Diverse

Another explanation behind the existence of many credit scores is the diverse needs of creditors. Although everyone in the industry agrees that certain factors, such as payment history and credit utilization, matter all the time, some lenders put more weight on some over others. For instance, an auto insurer might care about a person’s history of car repossession more than a mortgage lender.

Competition Exists (and Matters)

About 90% of the financial services industry uses FICO, but it is not the only game in town. Its main rival is VantageScore, a company formed by the major credit bureaus. None of credit scoring companies should claim 100% of the market share to prevent an absolute monopoly over the business that affects the financial health of every American.

In a perfect world, we only have one credit score that can precisely represent our financial behavior. In the one we live in, though, we have to rely on many to make up for the seemingly unsolvable inadequacies we contend with.

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