Last week FICO announced some big changes that have been making headlines; I have included parts of the press release below so you can read about those changes.
August 7, 2014—FICO (NYSE:FICO), “a leading predictive analytics and decision management software company, announced today that the new FICO® Score 9 introduces a more nuanced way to assess consumer collection information, bypassing paid collection agency accounts and offering a sophisticated treatment differentiating medical from non-medical collection agency accounts. This will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent. These enhancements help lenders because they result in greater precision. At the same time, the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.
FICO has used sophisticated modeling techniques to make the new FICO® Score 9 more predictive of a consumer’s likelihood to repay a debt than previous versions. This latest version of the FICO® Score, the industry-standard measure of U.S. consumer credit risk, captures recent consumer behavior to give lenders better risk assessments across the credit lifecycle and all credit products. It will be available to lenders through the U.S. credit reporting agencies starting this fall.
FICO is the leader in credit risk scoring, with 90 percent of all U.S. consumer lending decisions using the FICO® Score. Twenty five of the largest credit card issuers, 25 of the largest auto lenders and tens of thousands of other businesses rely on the FICO® Score for consumer credit risk analysis and federal regulatory compliance.”
What does that all really mean?
• With the newest version of the score, paid collections will now be ignored
• Unpaid medical collections will impact ones score less than before
• People with unpaid medical collections as the only negative mark on their credit report will see their scores increase
Now before you start doing cartwheels and looking for a new house to purchase let’s take a look at what this really means and when you might actually see the benefits from it. If you noticed in the press release they mentioned that this new score will become available this fall, but all that means is that FICO will start selling it at that time. They don’t mention when or if the changes will actually make their way to the lenders and banks across the country!
Market availability does not mean immediate market adoption. In order for a new scoring model to be adopted into the market it has to reach a point of critical mass. It takes years for the most current generation of a credit-scoring model to realize critical mass. FICO 8, the most current version of the FICO score, has critical mass but it was also made commercially available in July of 2009.
When the new model becomes available lenders in almost every industry would be able to convert to it under their own time frame. The one exception is the mortgage industry. Fannie Mae and Freddie Mac dictate what scoring model versions can be used in their underwriting systems. As of today all Fannie and Freddie mortgage loans are underwritten using FICO scores that are one generation off the most current.
In other words once this model becomes available from the current perspective of Fannie Mae and Freddie Mac, all that will be required is that lenders start using FICO 8, which again was the new hot change that happened all the way back in 2008/2009. That means consumers who have medical collections and/or paid collections will get no score improvement if they were to apply for a mortgage now.
These changes are just a reaction to the similar changes that VantageScore announced in March of this year. VantageScore is another credit scoring model, one that was created with a combined effort from the credit bureaus, and as much as they want to tell people they are eroding the market share from FICO it really hasn’t happened at this point.
Lastly, keep in mind that just because FICO and VantageScore have decided to ignore paid collections and medical collections they will still be on the credit report which means lenders, who are the ones actually lending money, will still see them and treat them how they feel is best when underwriting loans.