New FICO Formula Could Raise the Credit Scores of Many

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This post comes from Christine DiGangi at partner site Credit.com.

If you’ve ever had a debt collector call you, last week’s announcement from credit scoring company FICO may be good news for you.

FICO just released the newest edition of its general credit scoring model, FICO Score 9. The big changes come in the area of debt collection: The score will not include paid collection accounts, and it differentiates medical collection accounts from nonmedical debt.

These are significant changes for a few reasons: First, medical debt is often beyond the consumer’s control because, unlike unpaid rent or an unpaid utility bill, the consumer may have no way of anticipating health care needs or medical bills and, as a result, medical debt may not accurately reflect a consumer’s typical payment practices.

From our Solutions Center: Help with credit card debt

In addition, by removing paid collection accounts from the formula, consumers are, in a way, rewarded for meeting their debt obligations. In other scoring formulas, including FICO’s older score versions, collection accounts have a negative impact on a consumer’s score, paid or unpaid.

As is the goal with all credit scoring models, the purpose behind the changes to the FICO score is to better assess the risk consumers present to potential lenders. However, it’s up to lenders which scores they use, and it’s difficult to estimate how quickly the industry will adopt the new model.

The changes in considering collections accounts is similar to another formula in use: VantageScore 3.0. That model has grown in popularity, but FICO maintains about a 90 percent share in the credit scoring market.

“FICO’s announcement today appears to be a competitive response to the traction that VantageScore 3.0 has garnered amongst the largest lenders in the country, and changes to the new FICO model apparently try to remedy many lender and consumer challenges already addressed by VantageScore,” said Barrett Burns, CEO of VantageScore, in a statement to Credit.com.

Whatever the reason, formula changes could be very good for consumers. As score providers aim to design the most predictive models, ideally scores will become increasingly accurate reflections of a consumer’s credit risk, theoretically making it easier for consumers to change their scores through their financial behaviors.

New-score adoption is typically not a rapid process. Lenders tend to test a new model to make sure it serves their purposes better than the model in place, at which point they update their risk-assessment processes to include a new score.

“The advances in FICO Score 9 provide significant incentives for lenders to upgrade from earlier versions of the FICO score,” Jim Wehmann, executive vice president for scores at FICO, said in a news release announcing the update. “U.S. lenders can more consistently and precisely assess new applicants and existing accounts with a more robust credit score built on the most current credit data available, while minimizing operational hurdles associated with adoption and compliance. We stand ready to help lenders make that upgrade as smoothly and quickly as possible.”

As a consumer, you never really know what credit scoring model a potential creditor will use when reviewing your application, so it makes the most sense to focus on the fundamentals of good credit and increase your chances of receiving a good credit score, regardless of model.

An easy way to do this is to review the same credit score over time (checking the same score gives you an apples-to-apples comparison), and as your score changes, you can understand how your behavior impacts your creditworthiness. To see how your actions affect your credit standing, you can get two of your credit scores for free (including VantageScore 3.0) on Credit.com.

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  • senior3citizen

    It is about time they re-do their formulas! When I closed (unknowingly at the time it was best to keep them open for credit scoring) I lost 84 FICO points!!! I wanted to limit my accountability to one credit card and that seems to be a problem with scoring. Logically – I would think having one excellent account would be better than 3-4 accounts. Also when I had a hard hit it cost me another 40 points!!! I think FICO scoring should not be the only consideration. What happened to having you home paid for in consideration?

    • Jason

      A paid for home doesn’t make bankers any money. Credit scores are more than just evaluation risk, they also help banks find profitable customers.

      I understand the frustration. I have an old credit card issued by a credit union in the state I used to live in. I don’t use the card but don’t want to cancel it because it is my oldest active account on my credit report. I also have to keep an active account at the credit union to keep the card. It is a hassle but I’m waiting until after we purchase a house in our new city to cancel the card. I don’t want cancelling the card to effect my credit score and increase my mortgage rate.