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Forget Credit Scores: The Case for Credit Grades

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America's current average national credit score of 660 suggests that our credit health is failing.

Could the three-digit credit score number be to blame? With dozens of credit score models available, one survey found that 60 percent of consumers are confused about the scale of credit scores. If you've had a headache trying to understand your own credit score, pass the aspirin; you aren't the only one.

Forty-two percent of Americans surveyed prefer credit letter grades to three-digit numerical credit scores, compared with 30 percent who prefer credit scores. Could an A to F letter grade system help consumers better understand their credit?

"The benefit to consumers receiving both the letter grade and score value is greater understanding of how they might be viewed by lenders," says Barrett Burns, CEO and President of credit score provider VantageScore Solutions. While most credit scoring models rely on a three digit score range, the VantageScore model uses a 500 to 990 range along with a corresponding letter grade system; a score of 501 to 600 represents an F grade while 901 and up is an A grade.

A clearer understanding of their credit standing might also help consumers improve their failing grade to an A. "Moving to a grading system may help to diminish what I see as a ridiculous and unproductive amount of attention paid to point by point movements," says Mitchell Weiss, Barney School of Business board member.

However, there's a big reason why the credit industry isn't likely to adopt a credit grade system: Credit scores are a thriving business.

"The companies that develop credit scores receive hundreds of millions of dollars a year selling their credit models. It is in their best interest to keep models and ranges proprietary," says Ken Lin, CEO of, a site that provides free credit scores including the VantageScore.

In fact, the Consumer Financial Protection Bureau estimates the market for providing credit scores and reports has grown to more than $1 billion in revenue. Additionally, companies spend hundreds of thousands of dollars revamping their score models and marketing theirs as the best on the market.

With that much at stake, agreeing on a universal grading system in the marketplace would draw a stalemate. Case in point, Fair Isaac Corp., the company that created the popular FICO score, recently sued (and lost to) credit bureaus TransUnion and Experian for copyright infringement, claiming that the bureaus' credit scoring models infringed on FICO trademarks including the range 300 to 850.

It's a long-standing, lucrative debate of whose score is the true industry standard. The Consumer Financial Protection Bureau investigated the credit score marketplace to determine whether the myriad of credit score models -- and the high price they cost -- are beneficial for consumers. However, mandating a single score would mean the CFPB would choose winners and losers among the big credit scoring players, which is generally against federal policy.

So where does that leave us?

"Consumers want to be empowered about their credit," Lin says. "They're not interested in how they compare against other consumers or other models on a seemingly arbitrary scale; they want to know how their credit health is faring."

Providing letter grades in addition to the complex three digit scoring range could go a long way to help consumers understand, and potentially improve, their credit. But first, the credit industry would need to acknowledge that it's beneficial beyond the bottom line for consumers to understand their credit.

Convincing the financial industry to do something in favor of consumer interest? Hope you have a big bottle of aspirin; this headache may linger on for awhile.


Originally published on Forbes.