“Fico 9” Could Raise Your Credit Score by 25+ Points. But Will Lenders Adopt It?
FICO, the company that developed the widely used credit scoring model is making a few waves. Waves that should help consumers who have certain issues in their credit history. When applying for a mortgage, lenders rely on the FICO score to not only determine whether to approve a loan but what interest rate to assign to a borrower.
FICO scores look at five factors in a borrower’s credit history. Those five are:
- Payment History
- Available Credit/Amounts Owed
- Length of Credit History
- New Credit/Inquiries
- Types of Credit
Each category is weighted but the single most important category is Payment history. Payment history looks to see if payments were made no more than 30, 60 and 90 days past the due date. No late payments means a better score. For payments that are beyond 90 days and have gone into collection lower the score more than a payment that was made say more than 30 days late.
All three of the major credit bureaus, Experian, TransUnion and Equifax use the FICO model and mortgage companies get a score from each bureau. After receiving three scores, the lender throw out the lowest and the highest, using the middle score when evaluating a loan application. Yet the new scoring model can raise a credit score by 25 points or more according to Fico. This is important when a lender requires, say, a 620 score but the borrower’s score is 600.
Collection Accounts and FICO 9
The new changes are embedded in the ninth revisions of the original algorithm, dubbed FICO 9. The system was released to the credit agencies this fall and could be available to lenders by the end of the year. Yet, it remains to be seen whether lenders will adopt the new system, or use the previous scoring model.
There are two basic adjustments made by FICO that some say should have been in the scoring system at the outset and involves medical collection accounts and settled collection accounts. Before the widespread use of credit scores when underwriters evaluated a borrower’s credit report line by line, if there were collection accounts related to medical bills, the underwriter would give less weight to the outstanding account or even ignore the missive. The new changes will ignore medical collection accounts and will automatically raise the consumer’s score as if the collection account never existed. Why ignore just medical accounts and not others?
If you’re one of the tens of millions of unfortunate consumers who have had some serious medical issues in the past you know how confusing it is to deal with medical bills, co-pays, deductibles and insurance statements. Simply the sheer number of different charges from various sources leaves the consumer confused regarding who to pay and when. It’s not uncommon for a charge to be forgotten or even presented to the insured and the debt goes straight to a collection agency. If a borrower is delinquent on an automobile loan or a credit card bill it’s fairly straight forward but with medical payments it’s anything but.
Settled Debts and FICO 9
In today’s credit scoring lenders use, an outstanding collection account will lower a score but the older an unpaid collection account becomes, the less impact it will have. A collection account that appeared last month will lower a score more compared with an outstanding collection account that is say five years old. In fact, with regard to credit scores, sometimes it’s better to allow the old collection account to age instead of paying it off.
If that sounds a bit odd to you it does to most people as well. Doing the right thing and paying off an old debt should result in better score, right? Yet the current model counts paying off an old collection account as “recent activity” similar to a new collection account showing up last month. FICO 9 changes all that rewards a consumer who pays off or otherwise settles an outstanding collection account.
Will Lenders Use FICO 9?
Even though FICO 9 will be available by the end of the year that doesn’t mean mortgage companies have to use it. Mortgage lenders buy and sell mortgage loans in the secondary market and they all want to know they’re using the same scoring model. That said, it might be a while before mortgage companies begin using the new scoring system until they’re convinced the switch makes sense. Even today, most lenders have yet to adopt FICO 8 and are using the FICO 7 scoring model.
Yet the adaptation to FICO 9 might come at a quicker pace compared to adopting FICO 8 as mortgage underwriting guidelines have begun to soften somewhat as lenders became more eager to approve a loan than say just a few years ago when mortgage companies were viewed as being too “paranoid” to approve a loan and would rather decline a mortgage application instead of approving one.
FICO 9 changes make a lot of sense and it mimics solid underwriting guidelines lenders used in the past by rewarding paid collections and ignore those pesky medical collection accounts. How soon? Maybe next year. As home sales begin to slow and refinance activity all but vanished, lenders may push for an adoption to the new standard to help more borrowers qualify.