The new FICO Score 9 is coming out this fall, and it looks very positive for many U.S. consumers. Once implemented and used by lenders, it should help many with poor credit or limited credit histories. Ultimately, this could mean better rates for consumers on loans and credit products such as credit cards.
Score Highlights
There are three main areas that will impact credit borrowers with poor and limited credit. Overall, this is good news for today’s consumer and is a more accurate reflection of the actual credit risk for lenders. The new FICO credit score is more nuanced than the earlier FICO Score 8, which was released in 2008.
Minimizing Medical Collections Impact
A sad figure to be sure, but, according to Experian, a credit reporting bureau, 64.3 million U.S. customers have credit reports currently impacted by medical collections. Of the 317 million Americans, this means that one in five has medical collections showing on their credit reports. Many people do not realize that past due medical bills can negatively impact their credit score, but they can, even the ones charged off to collections.
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With advanced analytical systems and software at their disposal, Fair-Isaac, the company who generates the FICO score, will minimize the impact of medical collections on the score in the new system. Although the medical collection accounts will still impact the score negatively, but in FICO Score 9, the impact is minimized. This could mean a bump of around 25 points for many consumers.
So, good news fellow Americans! It's about time we have some good news regarding medical bills. I will not get on a soapbox about the cost of medical care; we all know it is expensive – about twice as much as other similar countries, but at least in the new system, those large medical bills should be less damaging on credit scores.
Accounts in Collection: New Rules
Many people are not aware of how accounts in collections are treated and scored from their credit reports. Let’s just say that under the current scoring, if you pay off something in collections today, it will have a minimal positive impact to your FICO credit score. It seems like that debt just washes away, as it does for the consumer, but in credit scoring, not so much. It hangs around for six years, showing up on your credit report as a collection item, even if it is paid off.
Again, this is good news! In the new scoring system, paid off accounts in collection will no longer be viewed as in collection. At the very least, that will minimize a negative impact on your credit score, and in my eyes, that is a win for the consumer. This will be good on the collection side as well as it may very well result in additional money collected over time. But, don’t go paying off all those old accounts in collection right now, especially if you would decrease your payments on current accounts. Although the new score will be available, look below to find out more about when lenders will actually start giving credit based on these new scores.
Limited Credit History
In lender’s jargon, around the coffee pot, they describe someone with limited credit history as having a “thin credit file”. That makes sense, there is not much paperwork, so the file is thin. I get it. So, like with any decision, you always want the most information you can collect before pulling the trigger and making the call. A loan decision is no different. With limited information, it becomes harder to make the decision, and that is where this new system comes in nicely.
Right now, the current system measures in absolutes: a Yes or No answer. Was the bill paid on time? The answer is a simple Yes or No. They count how many times an account was paid late. In the new version, they will look deeper into the credit history where they will penalize 30 day delinquencies less than 60 or 90 day delinquencies. For those with minor blips on their young credit history, this will help their score. For lenders, they will have a better way to measure early trends in repayment with limited information. I love it; this means a win-win for everyone.
Consumer Benefits
Of course, it is better to have a higher score, but what will this mean in terms of loans and credit? Credit experts predict that the increase in credit score will show more in terms of better rates for credit rather than qualifying for more loans or credit. So, although it may not mean more “yes’s” for credit, it can lead to you paying less for borrowed money.
The Final Buzzer: Not a Slam Dunk
All this sounds great for the consumer on the way they are reviewing credit scores for the new FICO Score 9. That is excellent news and should help a lot of people. The good news is that positive changes are on the way.
Here is the not-so-good news. Although this new system is released this fall, the lenders still have to implement it. Lenders, banks, credit unions and all institutions providing loans, credit lines and cards have to update their systems to accommodate FICO 9, which is a cost to the lender. FICO 8 was introduced in 2008, and there are still a number of lenders using an earlier version with their systems. BestPrepaidDebitCards.com founder, Curtis Arnold says, “If the past is any indication, it may not take months, but years before it is implemented by a majority of lenders.” Ouch. That is not what I wanted to hear.
But, lenders are usually motivated to make more loans, so those lenders who could see more loans with these score improvements in their systems will be motivated to implement these system changes. If consumers find they are getting better rates from lenders with this new system, those lenders should enjoy a competitive advantage until others catch up. Hopefully, that encourages the overall industry to respond faster. At least, we can hope for that.
Thanks for the improvements, Fair-Isaac. Now, lenders it is up to you.
Readers, we would love to hear your thoughts on this. How do you think this will roll out, and who will start using this first?
