Many Americans may not be aware of the new scoring system for credit scores called FICO 9. The new system, coming this fall, could potentially affect millions of people whose scores are negatively impacted by certain collection debt information. For people who have negative information related to medical collections, paid off debts or collections or who have limited credit histories, the new FICO 9 scoring model has the potential to raise credit scores by as much as 25 points according to Fair Isaac Corporation.
New FICO 9 Announced by Fair Isaac Corporation in August 2014
Fair Isaac Corporation, the San Jose, California-based company that provides credit scores, announced their new credit scoring system, FICO 9, in August 2014. The new scores are supposed to help people whose primary problematic credit issues have been medical collections or who have limited credit histories. The new system also treats collections that have been paid off differently than those collections that have not.
How FICO 9's Scoring Model Differs from the FICO 8 Scoring Model
FICO 8 is the credit scoring system that has been used by lenders for underwriting purposes for the past six years. The scoring model is used to determine an individual's creditworthiness and is used by Experian, Transunion and Equifax, the three major credit reporting agencies, in determining their own credit scores. The FICO 8 scoring model accords equal weight to both paid and unpaid collections of over $100 dollars for seven years. The scoring model does not take into account the different types of debt collections or credit information from other sources, such as rental history and utility payment history. FICO 9 will differ in that regard in several ways.
1. Medical debt collection account information
The FICO 9 scoring model will accord less weight to medical debts and collections. Millions of Americans who have had a major medical event resulting in difficulty paying medical bills could thus benefit by receiving higher scores. For the best mortgage rates, most lenders require FICO scores above 740. Since the weighting difference for medical debt could result in scores higher by up to 25 points for some people, this could potentially be a significant help, especially for individuals whose only negative information is due to the inclusion of a medical collection debt account.
2. Score consistency across credit reporting agencies
Fair Isaac Corporation will release the FICO 9 scoring system to all three major credit reporting agencies, allowing for better score consistency across the board. Fair Isaac will release FICO 9's scoring model to the three agencies later this year for them to test and validate the system before it is implemented by them. There is no word on how long the testing and validation process will take, however, before the new model will be used by the three agencies.
3. Paid off collections account information
Unlike the FICO 8 scoring model, FICO 9 will treat collections and debts that have been paid off differently than those that have not. Previously, paid off collections still appeared on credit reports and were taken into equal account as non-paid collections and debts, appearing for seven years. FICO 9 will give paid off collections much less weight than those that have not been, lessening their negative impact and thus potentially raising credit scores for affected individuals.
4. People with limited credit histories
Many people have limited credit histories which in turn result in lower scores. In weighing credit histories, the length and number of open accounts determines overall scores with longer accounts providing more information regarding individual's payment histories.
FICO 9 will look at more information to include in its scoring model. People who have few credit accounts but who have always paid their rent in a timely manner will now have that included in their credit scores. Other types of credit information, including such things as timely payment of utilities, will also be factored in. This will allow greater flexibility in the provided credit scoring model and could help people obtain loans.
Mortgage Lenders and Their Use of Fico 9
Although FICO 9 could potentially benefit millions of Americans, there is no guarantee lenders will adopt it. Lenders have automated underwriting systems in place for determining loan creditworthiness of individuals. Incorporating FICO 9 will be expensive as those systems would need to be updated. Lenders take more than an individual's credit score into account when making underwriting decisions as well. Fannie Mae and Freddie Mac have both indicated they do not plan to use FICO 9 anytime soon. Major private mortgage lenders, including banks and mortgage companies, also do not appear to be ready to adopt the new scoring model soon either.
It is unlikely that mortgage lenders will not use FICO 9 for quite some time, at least until Fannie Mae and Freddie Mac change their own underwriting programs to use FICO 9's scoring model. Some lenders already insist they discount medical collection debt already and so do not see a need to adopt FICO 9 as the benefits, according to them, will be small. People may thus not realize the full benefit of the consumer-friendly changes of FICO 9 for several years.
Information Will Still Appear on Credit Reports
Although the scoring model will weigh medical collections and paid off debts differently, consumers must still understand that the collection information will still appear on their credit reports for seven years in most cases. Lenders look at both credit scores as well as information appearing on credit reports in making their decisions. When paying off a collection, it still makes sense to try to get an agreement with the company in writing that they will remove the negative information from the credit report upon payment of the account. Although the debts will not be accorded equal weight under FICO 9's model, there is nothing preventing lenders from using the information on the credit reports in making their determination separate from the score itself.
Fair Isaac's new FICO 9 scoring model provides some new consumer-friendly credit protections. Potentially, many people could realize an improvement in their individual scores and be able to obtain better loan rates as a result. The benefits may not be realized by Americans for several years, however, as lenders and banks will first need to update their automated underwriting systems to incorporate FICO 9 and none have announced any plans to do so in the foreseeable future.