DR 097: 3 Key Changes Just Made to the FICO Credit Scoring Formula

Here are details on the three changes.

Accounts Paid in Collections

Before FICO 9, late payments affected your FICO score for seven years. What’s more, paying the debt in full didn’t remove the late payments from your credit profile. While the impact to your score diminished as more time passed, late payments still scarred your credit for seven full years.

With FICO 9, debts referred to collection agencies that are paid in full will no longer hurt your score. The key here is that the collection item must be paid in full before it will be removed from your credit score calculation. For those rebuilding their credit, this development may go a long way to improving your credit.

Medical Debt

The second change involves how unpaid medical debt affects credit scores. FICO has determined that not all debt is created equal. With the change, unpaid medical bills will not affect a consumer’s credit score the same as other unpaid bills. With the change, according to FICO, “the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.”

If you think 25 points is not a big deal, check out how your credit score affects mortgage payments.

Limited Credit

Those with limited credit, called “thin files” in the business, may also get a boost with FICO 9. While not all of the details have been revealed, one change relates to repayment history. Rather than looking at repayment history in black and what (either the payment was on time or it wasn’t), the “FICO data scientists represented a consumer’s repayment behavior in degrees of risk.”

What does that mean? While FICO didn’t explain in detail, I suspect they will be looking at factors such as type of debt, amount owed, amount paid, and certainly other factors. For consumers with thin credit files, the change may offer hope for more credit and reasonable interest rates.

A Word of Caution

There are a couple of things to keep in mind with the new FICO 9:

First, not all lenders will use the new formula right away. The mortgage industry continues to use an older FICO formula. The costs can be significant for a lender to upgrade to a new credit scoring model. The key is that consumers won’t see the benefits of the new FICO 9 formula for those lenders who have yet to upgrade.

Second, There are many different FICO credit score formulas (not to mention credit scoring formulas not based on the FICO formula). As noted above, there are numerous versions of the FICO score. In addition, there are industry specific FICO scores for credit cards, auto loans, and mortgages.

Keep this in mind when you get copies of your score from myFICO or see your score from one of several credit card companies that provide it for free (like Discover it® chrome and Barclaycard). It’s good information that can help you keep track of where you stand, but it may or may not be the same score a lender uses to evaluate your loan application.  You can check out other ways to get you credit score for free here.