Equifax Undercuts FICO with Lower-Cost Mortgage Scores

On the heels of FICO’s recent direct license program, Equifax is the first of the three major credit bureaus to respond.

It announced that VantageScore 4.0 will be priced at $4.50 per score, about half of what FICO will charge next year. In addition, Equifax will provide VantageScore 4.0 for free through 2026 to customers who purchase FICO scores. 

This will likely spur interest — and possible adoption of — the Equifax model. The lower costs and broad data offered by VantageScore 4.0 may make it easier for consumers with thin or poor credit histories to obtain a mortgage.

Lenders will benefit from price cuts and the additional borrower information, including income and job data from The Work Number as well as telecom, rental, and utility histories showing who pays bills on time even without deep credit files. 

Moreover, VantageScore 4.0 reports several months of trended data, not mere snapshots. Equifax asserts that this may help lenders detect patterns that will lift approvals by 20% while minimizing additional default risk.

The bureau says using alternative data makes it possible to score 33 million more U.S. adults, including millions of thin-file, marginal, and credit invisible borrowers who have long been overlooked.

FICO Changed the Rules

FICO threw down the gauntlet last week by offering lenders and resellers a way to avoid the markups charged by the credit bureaus. Customers can choose a $10 flat rate or pay $4.95 per score plus a $33 funded-loan fee. The break-even point for these pricing options comes in at about a 15% loan closing rate.

The FICO rates have changed, but the data is pretty much the same as before. Customers don’t get telecom, rental, or trended information — just the traditional data from credit files. Lenders looking for new insights may favor VantageScore 4.0 when dealing with nonprime borrowers.

Why Credit Scoring Professionals Care

Professionals in the credit scoring sector — model builders and underwriters — must ask whether the extra information packed into VantageScore 4.0 really helps increase closings without additional default risk.

Look for new types of deals flowing out of the reduced prices and heated price competition. For example, vendors may change the way they bundle services or charge license fees. Compliance officers may need tighter audits. And regulators should care about the new plans to see if they are fair, unbiased, and transparent.

I say “should” because the current Federal regulatory mechanisms have been effectively neutered this year. It remains to be seen how much slack the states can take up.

What It Means for Subprime Lenders

For lenders that deal with high-risk borrowers, the shift hits home. VantageScore 4.0’s new signals have the potential to reveal solid applicants that previous versions overlooked. The $4.50 pull price makes prequalifying more borrowers feasible, and additional score offerings allow underwriters to customize decisions to thinner files.

Better segmentation can result in smoother portfolio risk, which reduces unexpected default spikes. Equifax’s statement that alternative data can score 33 million more adults highlights the way that such tools can extend credit access to the credit invisible and the low-score borrowers who have often been shut out.

That’s not to say that it’s easy to juggle two scoring systems. Think of the extra work involved with integration, training, auditing, and oversight. Hasty moves could lead to pricing errors or loans that default or miss profitability targets

Strategic Implications

We should take note of a few prominent trends. Competition may heat up as lower costs help smaller lenders enter the market. Overlooked borrowers may now get better access to mortgages because of the additional data offered by VantageScore 4.0.

But lower prices also mean tighter margins, and there will be the costs of retraining staff.

It’s likely that new questions will arise concerning consent, privacy, and data quality. In the future, a hybrid model may develop that blends the traditional credit files with alternative data streams. The nonprime world will have to adapt how it measures and prices risk.

The question on the horizon is how the other two major credit bureaus, TransUnion and Experian, will react. Will they be forced to lower prices and broaden the data they offer? Ultimately, we may see cheaper, smarter credit tools that rapidly change mortgage and subprime lending.

Equifax CEO Mark W. Begor said, “By offering VantageScore 4.0 credit scores alongside FICO Scores, we are making VantageScore more easily accessible to the mortgage market. More data drives better decisions, and better decisions expand credit access to more U.S. consumers.”