Last week, FICO announced the release of a new set of scoring models, known as FICO 9. This new model includes important updates in the way collection accounts and medical debts are weighed when creating a credit score. These changes will affect the way credit scores are calculated in some cases, but not in others. Get the scoop on the FICO 9 scoring model in our video with credit expert John Ulzheimer.
Hi I’m John Ulzheimer, a credit expert who contributes to Credit Card Insider.com. Today’s question is this: What is FICO 9, and how does it differ from the older FICO scoring models? That’s a very good question.
In August of 2014, FICO, the company that is behind the FICO credit scoring system announced a new suite of scoring models that will become available either in the fall of 2014 or early 2015, and the name of those scoring models is FICO 9, that’s the name of a suite. FICO 9 is actually 12 different credit scores. Each of the credit reporting agencies, every time a new FICO score is developed gets a generic version of the score and then a version for auto lending, mortgage lending, and credit card issuing. So that’s 4 new scoring models times 3 credit bureaus equals 12 new scores sometime this fall or in 2015.
This is essentially a scheduled redesign or redevelopment of the FICO scoring system which generally happens every few years. This one took a little bit longer, the last time the FICO score was redeveloped was FICO 8, and FICO 8 came out in July of 2009. So FICO 9 took 5 years to to be implemented or to be introduced relative to FICO 8.
The primary differences between FICO 9 and the other versions of the FICO score, is how the model treats collection accounts. FICO 9 will now ignore, or bypass is the technical term, bypass any collection agency accounts that have a zero balance. That means that once they’re paid or settled, and then updated on the credit report to show a zero balance, FICO 9 will then ignore them. FICO 8 and all the other versions of the FICO score did not ignore collections even though they may have been paid or settled.
In FICO 9 a second considerable difference to the older versions is how the scoring model treats unpaid medical collections. So a medical collection is obviously a collection account that shows up on a credit report because a consumer went to the doctor, was unable to make payments, and defaulted on their obligation, and the doctors office then outsourced the collection activity of the account to a third party debt collector who then reported it to you the consumer’s credit reports. A credit report clearly identifies medical related collections versus other types of collections for things like unpaid credit card bills or default on apartment leases for example.
In FICO 9, a medical collection that is unpaid is going to be discounted, not ignored, discounted relative to how other unpaid collections are treated. So if you have medical collections on a credit report even with a balance, then FICO is not going to treat them as harshly as it treats other types of collections that are unpaid. So this is obviously going to help the consumer who has got a pristine credit report but for a few unpaid medical collections, and then eventually once those collections are settled or paid, either by the insurance company or by the individual debtor themselves then obviously they’re going to cease to be considered, because in FICO 9 they don’t consider or they bypass paid collections.
Now one thing to keep in mind, or actually a couple things to keep in mind, just because the credit scoring model is either ignoring or discounting the collection item, that doesn’t mean that it’s still not going to cause you problems, it’s still going to be present on your credit report which means that any lender, any insurance company, any employer that looks at a credit report to help them make a decision about you is still going to see the collection elements and they can still consider those to be negative and hold them against you even though the scoring model may not necessarily do so.
The second thing to keep in mind, this is very important, is that just because they build it doesn’t mean that they will come. Even though the model will be introduced over the next few months doesn’t mean that there’s going to be this rush to implement it. It generally takes several years before a model actually gets a critical mass of users. The FICO 8 score is a great example. It’s been out since July of 2009 and it now currently has critical mass, and that took a very long time for that to happen. It costs millions of dollars, takes many many months if not years for really big lenders who have customized underwriting systems to study the impact of implementing a new scoring tool, it’s not as simple as just unplugging one and plugging in the other and continuing to do business, it doesn’t work that way.
And finally, in the mortgage environment, Fannie and Freddie are really the ones that dictate the type of score that can be used so even though mortgage lenders may want to use the new score they may not be able to use the new score because of Fannie and Freddie’s guidelines. In today’s mortgage environment the score that’s being used per Fannie and Freddie’s guidelines isn’t even FICO 8, and when FICO 9 comes out in the mortgage environment the score that’s used is going to be 2 generations old.
So while consumers may benefit in some lending environments because of the new score and how it treats collections, they will not benefit at all in the mortgage environment until Fannie and Freddie have allowed their army of lenders to actually use that version of the score.
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