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
evnironment, 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.
If you have any questions pertaining to credit or other financial topics, then please
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Thanks for watching and have a great day.