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
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 whatsoever. 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 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 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 expect to see a credit score increase of around 25 points.
Why You Shouldn't Be Too Excited Yet
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 will likely not be adopted by lenders for a very long time.
It is timely and expensive for lenders to upgrade to a new credit scoring model. Lenders do not change credit scoring models 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 at accurately predicting risk than the previous version they have been using. Even then the change is likely to be slow because, after all, their current scoring model isn't broken, it just is less effective.
The previous version of FICO to be released, FICO 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, the version released prior to FICO 8 is still in use. It will likely be a very, very long time before the new FICO 9 Score is ever seen on a Residential Mortgage Credit Report (RMCR).
Additionally, there is no guarantee that 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 is the credit scoring product offered by the credit reporting agencies - Equifax, Trans Union, and Experian. While the vast majority of lenders continue to use FICO credit scoring models to calculate risk, VantageScore has been gaining ground little by little since its unveiling in 2006.
Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.