New FICO Score Model
New FICO Score Model Could Boost Credit for Millions
There’s big news in the credit scoring industry: FICO, the company responsible for the most widely used credit score in the United States, announced on Aug. 7, 2014, that the newest generation of its scoring model will differ substantially from past versions.
Known as FICO 9, the new model will hit the scene in fall 2014. Wondering how FICO 9 is different and how your score will be affected by the changes? Take a look at the details below!
What’s new with FICO 9?
The FICO 9 model differs from FICO 8 (the model currently in use) in two major ways:
- It will differentiate between medical and non-medical bills that have gone into collections; medical bills in collections won’t carry as much weight in consumers’ scores. FICO 8 makes no distinction between unpaid medical and non-medical bills.
- It will disregard accounts in collections that the consumer has already paid. FICO 8 makes no distinction between paid and unpaid accounts in collections.
To get a better sense of why these changes were implemented, the Nerds reached out to Anthony Sprauve, director of public relations at FICO. He told us:
“Many consumers have medical debt and we’ve found that this does not necessarily indicate an unlikeliness to repay other debts. Giving less weight to unpaid medical bills in collection, which, by the way, are more than 50 percent of all unpaid collection debt, is a way to possibly increase the chances of someone who is otherwise a good credit risk getting a loan.”
Treating medical debts differently is a welcomed change
Although FICO 9 is intended to better predict consumer risk, the reality is that pressure to reform the nation’s dominant credit scoring model has been mounting. In May 2014, the Consumer Financial Protection Bureau (CFPB) released a report that said millions of Americans’ credit scores are being “overly penalized” by medical debts in collections. Media outlets picked up the story, and widespread questions about current credit scoring models ensued, largely because so many people in the United States are struggling with medical debt.
A NerdWallet analysis found that in 2013, 20% of American adults were struggling to pay their medical bills. What’s more, the same study found that nearly 17 million will receive a lower credit rating due to high medical bills. The revisions to FICO’s scoring model will be welcomed by people suffering from both a serious health condition and a credit score that got damaged as a result.
Should you expect your score to rise?
Whether or not your score will rise when FICO 9 goes into use depends entirely on the factors that are affecting your score right now. (Not sure what they are? Take a look at your credit report to find out).
According to an article in the New York Times:
“Because of the new scoring model, individuals with a median score of 711 — and an otherwise clean credit history, except for unpaid medical debts — may see their FICO score rise by 25 points … But consumers whose credit files are tarnished only by unpaid medical debts that went to collection agencies — but were ultimately settled or paid — are likely to see a much greater increase in their scores.”
Basically, if your credit score is low as the result of unpaid medical bills or bills that went into collections that you later paid, you’re likely to get a boost from FICO 9. Otherwise, your score probably won’t change because of the new model.
But remember, you have the power to boost your score by making smart money moves, including:
- Paying your bills on time
- Keeping the balance on your credit cards below 30% of your total credit limit at all times
- Using credit as early in your adult life as possible
- Keeping a good mix of credit accounts on your credit report
- Applying only for credit that you actually need
The takeaway: FICO has revamped its credit scoring system to weigh unpaid medical bills less heavily than previous models. Also, accounts that go into collections and are later paid off won’t be factored into consumers’ scores. If your score is being affected by either of these factors, you could see a jump when FICO 9 is released in the fall of 2014.
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