What you need to know about the latest credit scoring formula
There are a number of different companies that provide software to banks and consumers for determining the credit scores of Americans applying for credit or mortgages. The biggest of these companies is FICO® (Fair Isaac Corporation). Two years ago,FICO® announced that it would be making changes to its credit scoring formula-FICO® 9. However, it’s only now that FICO® claims that banks have begun to adopt their new formula at a more accelerated pace. What this means, exactly, no one outside of FICO®- in the real world – really knows. Consumers beware…we believe this FICO® 9 software to either be an easy way for FICO® to talk its banking clients into paying huge upgrade fees, or a way to make predictive lending models spit out results that are more favorable to the lender and unfair to the borrower. Maybe both.
The differences of FICO® 9
The following are some of the differences between FICO® 9 and the previous credit scoring software, FICO® 8:
- Unpaid medical bills don’t have as much weight – The biggest change that FICO® has made to its formula is that unpaid medical bills are no longer treated the same way. Medical bills that are sent to collections will no longer hurt your credit score as much as other debts that are sent to collections. One of the reasons for this is because medical debts are often out of the control of consumers. You may overspend on electronics and entertainment, but you can’t typically be held responsible for overspending on emergency room visits as this isn’t usually a financial choice that you’ve made. FICO® therefore decided that medical bills sent to collections aren’t as indicative of credit risk than unpaid non-medical debts.
- Collection matters are handled differently once paid – When a debt is sent to collections, it will hurt your credit score. FICO® has already changed how medical debts sent to collections will affect your score, but they’ve also decided to disregard collection matters that you have paid in full. This means that they will no longer act as a permanent blight on your credit.
- Rent payments may count – Before, rent payments were not factored into your credit score. However, IF your landlord reports rent payments to the credit bureau, they will now be factored into your score. This can be very helpful in a couple of ways. First of all, if you pay your rent on time and in full, it will show lenders financial responsibility. Secondly, if you have a limited credit history, then simply paying your rent on time and in full can help you build strong credit. Please note the big “IF” your landlord reports your rent history, because right now, there are about…umm…NO landlords who have the permission to report rental information to all three of their tenants’ credit reports.
Getting your FICO® 9 score
Even though the Fair Isaac Corporation claims that FICO® 9’s changes are widely approved of, it’s still not as widely used as FICO® 8, much less FICO® Classic. One of the reasons for this is because it can be expensive for lenders to change their underwriting process. It takes a huge amount of time to test any new scoring model. Also, many lenders, to include Fannie Mae and Freddie Mac (the quasi-governmental agency that handles nearly every mortgage processed in the country) remain happy with the older FICO® Classic model. Although there are a number of ways to access your FICO® Classicscore, there’s only one way to access FICO® 9 and that’s through myFICO – and you will have to pay a fee. This may change eventually, if FICO® 9 ever becomes adopted by the big banks and the US Government (Fannie Mae/Freddie Mac), but that is highly doubtful to us.
The Fair Isaac Corporation claims that FICO’s new credit score formula contains a number of changes that should help to improve the credit scores of consumers. Believe it? Yeah right…looks to us like this is just another “hide the truth behind a curtain of pretty flowers” kind of scenario. Consumers beware!