Thursday, November 10, 2011

New way to calculate FICO Scores. What does that mean for your credit score?

Though the Fair Isaac Corporation (FICO) introduced a new credit-scoring model more than three years ago, lending institutions are only now beginning to adopt it. According to a new report on, the delay could be bad news for consumers hoping to apply for credit or loans.
The new model, called FICO 8, was ready for adoption in 2008 and rolled out in 2009. But, aside from Citibank, which adopted the new scoring method earlier this summer, the major lenders in the U.S.  have yet to change their scoring techniques.

FICO Background

The FICO credit score is generally heralded as the gold standard in the lending industry. This score ranges from 300 to 850 and determines what kind of rates consumers get on loans (and whether they qualify for loans at all).
Negative credit actions (including defaulting on loans, filing for bankruptcy, going into foreclosure, etc.) lower a credit score; positive credit actions (paying bills on time, having a low credit usage ratio, etc.) raise it.

What does the nwe FICO Score mean to borrowers?

Sources note that FICO 8 introduces scoring tools that could give consumers a better chance of qualifying for loans, including:
  • Less emphasis on unpaid debts under $100. Many of those debts, it seems, might be from the doctor. According to the Commonwealth Fund, 14 million Americans are currently fighting medical bills. The FTC notes that half of all debts in collections are medical.
  • More consumer categories. Rather than dividing consumers into 10 groups, FICO 8 carves out 16, meaning that scoring tools will be able to more accurately predict consumer behavior.
  • Fairer comparisons.The new model allows lenders to compare someone with, say, a short credit history to others with histories of a similar length. This will help provide a more accurate picture of whether or not someone is a good credit risk compared to her peers.
  • Credit utilization will count more. To balance the effect of counting small unpaid debts less, high credit utilization ratios will hurt a score more significantly (i.e. those with maxed out on cards will suffer).

Why the wait?

According to, the delay in adoption of FICO 8 might be related to a number of factors. Fannie and Freddie for example, are currently facing opposition in Congress to the government support they enjoy. After suffering major losses in the mortgage meltdown, they may be more focused on staying afloat than changing the way they do business.

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