Last week, on August 7th to be precise, a highly anticipated announcement was made regarding the upcoming release of the new FICO 9 credit scoring system.
FICO® Score 9 will become commercially available in the fall of 2014, and will feature some pretty radical and exciting changes in the way that the scoring system calculates consumers’ credit scores. The new scoring system features 12 scoring models which will be installed on the mainframes of the 3 major credit reporting agencies – Equifax, Trans Union, and Experian.
The Good News for Consumers
In Fair Isaac Corporation’s press release regarding FICO Score 9, it was revealed that there will be 2 major changes in the way the new credit score system treats certain types of collection accounts.
First, paid collections will be ignored and bypassed. The bypassing of paid collections is a departure from previous versions of FICO scoring models which are currently in use by lenders today. Under previous versions of FICO, paying or settling a collection account usually has no positive impact upon a consumer’s credit scores.
The design objective of FICO scores, in other words what FICO scores are created to do, is to predict the likelihood that a consumer will become 90 days past due (or worse) on any account within the next 24 months. The reason that paying collections typically does nothing to help a consumer’s FICO scores is due to the fact that current versions of FICO are built to be concerned with the fact that a collection account occurred in the first place. Whether a collection account has a $0 balance or a balance greater than $0, the negative score impact is likely the same.
Bypassing paid collection accounts by FICO Score 9 will be a major change, one that could cause credit score increases for many consumers.
The second major change being introduced with FICO Score 9 is how the scoring system treats medical collection accounts. Under previous versions of FICO, medical collections were just as damaging to a consumer’s credit scores as non-medical collections. However, according to Fair Isaac Corporation, FICO Score 9 “…will help ensure that medical collections have a lower impact on the score.” In fact, consumers whose only derogatory accounts are medical collections could see a credit score increase of around 25 points.
Why You Will Need to Be Patient
FICO Score 9, scheduled to become commercially available in the fall of 2014, promises some changes which consumers and loan officers are excited to see. Unfortunately, the new scoring model may not be adopted by lenders for some time.
It is timely and expensive for lenders to upgrade to a new credit scoring model. Lenders do not change credit scoring models just because a new one becomes commercially available either.
It’s not like lenders will line up around the block to purchase the new FICO Score 9 as if it were the hottest new smart phone release from Apple. Instead, lenders make a change because their own extensive research proves that the newer scoring model is more effective and accurate when it comes to predicting risk than the previous version they have been using.
Even then the change may be slow. After all, their current scoring model isn’t broken, it is just is less effective.
The previous version of FICO to be released, FICO® Score 8, is only now being used by a majority of lenders. FICO 8 was released in 2009.
In the mortgage industry, where the credit scoring version choice is controlled by Fannie Mae and Freddie Mac, scoring models released prior to FICO 8 are still in use. So, chances are high that it will be a long time before the new FICO 9 Score is ever seen on a Residential Mortgage Credit Report (RMCR).
Finally, remember that there is no guarantee the new FICO 9 Score will be adopted by lenders at all. Yes, FICO has been the undisputed leader in the credit scoring market for decades, and they likely will remain the leader in the future. However, FICO is not without competition.
VantageScore Solutions, a company created together by the major credit bureaus, also creates credit scores (aka VantageScore credit scores). While the vast majority of lenders continue to use FICO credit scoring models to calculate risk, VantageScore is a relevant force in the marketplace, and has been gaining ground since its unveiling in 2006.