The New FICO Score Model is Coming Our Way This Summer: Part Two!

Part One is Here

There are considerable changes between FICO 8 and FICO 04. FICO 8 is the most “pro-consumer” model to date, although some new measures are more punitive. Here is what changed (from the horse’s mouth):

High credit card usage

FICO 8 score is more sensitive to highly utilized credit cards. So if your credit report shows a high balance close to the card’s limit, your score will likely lose more points than it would have previously. You may want to consider keeping any monthly credit card balance low.

Translation: keeping your utilization rate (debit to credit ratio) as low as possible is more important than ever!

Isolated late payments

If a lender reports to the credit bureau that you were at least 30 days late with your payment, your FICO 8 score will likely lose points. If the late payment is an isolated event and your other accounts are in good standing, the FICO 8 score is more forgiving compared with scores from previous FICO formulas. However if your credit report shows numerous late payments, the reverse is true and your FICO 8 score will likely lose more points.

Translation: if you are late once, you will be better off with the new score. If you are habitually late with your payments, it will take longer to recover. 

Authorized user of credit card

Every generation of the FICO score formula has included authorized user credit card accounts when calculating a person’s score. FICO 8 score continues that policy. This can help people benefit from their shared management of a credit card account. It also helps lenders by providing scores that are based on a full snapshot of the consumer’s credit history.

To protect lenders and honest consumers, the FICO 8 formula substantially reduces any benefit of so-called tradeline renting. That’s a credit repair practice that entices consumers into being added to a stranger’s credit account in order to misrepresent their credit risk to lenders.

Translation: credit repair clinics have become even more useless than they were before, but the benefits for authorized users still exist.

Small-balance collections accounts

FICO 8 score ignores small-dollar “nuisance” collection accounts in which the original balance was less than $100.

Well, no translation needed. This is a great news for consumers.

Like I mentioned, many people, including me, have reported seeing their score increased considerably after Barclaycard began reporting. So apparently, FICO is doing something right.

FICO 9–Anything?

But what about this new FICO 9 score. The details are very scarce, but there is one supposed tweak that is about to improve lives of perhaps hundreds of thousands of Americans (it it comes true).

For decades, unpaid medical bills have been hanging over consumers like the sword of Damocles. Unpaid medical bills account to over 50% of all collections on credit reports.

Healthcare is not a new car, home renovation or flashy jewelry. One does  not plan for a catastrophic illness. It just hits people on a head with a hammer.

The truth about the US healthcare system is that a lot of people who think they are insured, safe, and sound, are not. They have no idea how much they will be paying until after the treatment. Getting hit with an astronomical medical bill is not the same as being hit with a bill for a poor business or financial decision.

The Consumer Financial Protection Bureau (CFPB) has issued a report that finally recognizes the fact everyone has known for years:

Credit scores may underestimate creditworthiness by ten points for consumers who owe medical debt: Treating medical and non-medical debt that goes to collections the same overly penalizes some consumers by giving them lower credit scores. Specifically, the study found that consumers with medical debt generally paid back their loans or bills on par with consumers with scores about ten points higher…

Credit scores may underestimate creditworthiness by up to 22 points after paying off medical debt: Traditionally, credit scoring models have not accounted for repayment of medical debts in collections. The study found that consumers who subsequently paid medical debt that had gone into collections were more likely to pay back their debts, on par with consumers with scores 16 to 22 points higher…

FICO 9 is about to correct this. Says Anthony Sprauve, FICO’s Senior Consumer Credit Specialist:

Medical debt is a serious issue affecting many Americans. Over the last 18 months, as part of our ongoing refinement of the FICO Score, our research of recent consumer credit data has led us to make changes in the way the FICO Score assesses collection agency accounts.  FICO Score 9, which will launch later this year, continues to adapt to the changing credit landscape by using a more nuanced approach to assessing consumer collection data.  As part of this refined credit assessment, medical collections will have a smaller impact than non-medical collections.

Photo By: Simon Cunningham

To Be Concluded