FICO Has a New Credit Scoring Model
The Fair Isaac Corporation, developer of the FICO credit scoring model, recently announced changes to their scoring algorithm, resulting in the latest version, to be called FICO 9.
If you have debts that were paid after being sent to collections, or currently unpaid medical bills, the changes brought by FICO 9 may boost your credit score by 25 points or more. That kind of improvement in your credit score could lower the interest rate you can negotiate and potentially save thousands of dollars in interest charges on a loan.
Wanting to understand the implications of FICO 9 better, I read several news releases on the subject. Some articles declare the changes will benefit consumers. Others warn these dramatic increases in FICO scores will give more credit access to those who shouldn't have it.
Following are my take-aways from the articles I reviewed. You can be the judge regarding the significance of the changes and how your credit score may be affected.
- According to a quote in The Wall Street Journal, previously a debt sent to collections could stay on a borrower's credit report for as long as seven years, even after the debt was paid or when the borrower was current on other debts. The resulting credit score could have been lowered by as much as 100 points. Under the new scoring model "debts that went to collections but were paid off will have no negative effect" on a person's credit score, reported The Fiscal Times.
- Perhaps a more significant change in the scoring model involves unpaid medical bills, because of the frequency of this type of debt. Both US News & World Report and The Wall Street Journal cited a fact from the Federal Reserve: more than half of collections on credit reports are from medical bills. A report from the Commonwealth Fund states that in 2012 "41% of US adults had trouble paying medical bills", according to The Wall Street Journal.
- Consumers may not be aware of disputed medical bills. "In some cases, medical bills ended up in the hands of collectors because of a billing error or some other confusion about what should have been paid by health insurance", reports The New York Times. Other lenders such as credit card companies may send multiple late notices, giving a consumer the opportunity to pay. Not so when there is miscommunication between patient, their provider, and their insurance company, says FICO spokesman Anthony Sprauve in several news releases.
- The Fair Isaac Corporation releases a new credit scoring model every few years, with the last being in 2008. The new FICO 9 will be introduced to credit bureaus this fall and to lenders by the end of 2014. However, lenders actually adopt scoring models on their own schedules. For example, The Wall Street Journal states the FICO model used by most mortgage lenders is "two versions old". All in all, credit scores may not jump as quickly as news reports about the scoring model changes imply.
For more information about credit management, read Know Your Credit on line in the K-State Research and Extension Bookstore.