FICO will be implementing their new credit analysis scoring model, which will be called FICO Score 9, in the fall of 2014. FICO is the largest comprehensive consumer credit scoring agency in the United States and is used by 90 percent of those who lend money to U.S. borrowers. The company is a software analytics company that uses a series of algorithms and data analytics to determine the risk of lending to an individual. Recently they announced the release of their new credit scoring model that is supposed to help consumers with medical debt, or those that have paid off bad debt, obtain loans easier.
Many consumers do not know how their credit score is calculated, and as it pertains to credit scores, the old saying, “ignorance is bliss” does not apply. In the past, if a consumer had “bad” debt, also known as a charged off account, and they paid it off, the debt would not fall off their credit report. Instead, it would “refresh.” This means that an individual who decided to pay off a charged off account after two years would actually be hurting their credit score.
The new model will make it easier for consumers to get approved for credit. With the new model, when a person applies for a loan, if they have a charged off account and their credit is on the border of approval, they will have the ability to pay off charged off accounts and see an increase in their credit score quickly. So, the new model will not just help a consumer who pays off outstanding charged off accounts, it may also encourage consumers to settle old debts.
Additionally, after the implementation of the new scoring model, FICO Score 9, outstanding medical bills will not have as much impact on a consumer’s score. Many people do not realize that medical bills negatively impact their score. Medical bills are factored in credit score calculations now, and they will be in the future, but they will have less weight in the overall calculation in the new credit scoring model.
The new model is supposed to help consumers who have not built an extensive credit history, including the lenders who serve them, by giving a more comprehensive analysis of each person’s individual credit portfolio. In the past, not having “enough” credit was a reason many lenders denied an applicant’s request for credit. The new scoring software is supposed to take a closer look into what credit the person has, and make a determination on their likelihood to repay based on that information.
FICO issued a press release on August 7, 2014 giving information on the changes that would be taking place. The press release states that the new scoring model uses greater precision in determining a consumer’s credit worthiness. It will give a more comprehensive overview instead of lumping people into categories based on one aspect of their report.
The new scoring model will be available across all three credit bureaus and is supposed to offer a more consistent score over each. Lenders will be able to use the new system to make a determination for extending credit of all loan products. However, those that want to implement the use of the new model FICO Score 9 product this fall will need to update their system. FICO feels that the benefits of the new scoring model will drive lenders to purchase the updated version.
By Amy Gilmore