FICO, the most common credit score used in lending recently announced a significant change. Later this year they are releasing a new version of their software. The new version will be named FICO 9. So what does this mean to you? For many people, a great deal.
The main difference for consumers is how third-party debt collections are scored. The FICO 9 will score medical collections different than other types of collections. Medical collections will continue to be detrimental but they will be less averse to your score than other types of collections. All other FICO versions score collections the same regardless if they are medical or not so this is big.
A second huge change is for the first time ever, FICO 9 will ignore paid collections. This includes medical collections as well as other types of collections. This is a major change to how the previous versions of FICO work. Understand, collections will remain on your credit reports and can be considered by lenders; FICO 9 will just be bypassing them when calculating your score.
For those of you who have collections and think this news is the savior to your credit score, you may want to save the celebration. FICO is not changing past scoring models, meaning current and older models will still score collections the same way as they always did. Lenders choose what scoring models as well as what versions of the models they use.
For those of you looking to buy or refinance homes, you may not find any benefit with the new FICO 9. Fannie Mae and Freddie Mac require a certain FICO version. The vast majority of all mortgage transactions are underwritten using Fannie Mae and Freddie Mac guidelines. These guidelines require a 2004 version of FICO scoring. To date, Fannie Mae and Freddie Mac never adopted the most recent version of FICO; it is called FICO 08 which has been available since 2009.
Only time will tell how what financial institutions adopt the latest version of FICO. For consumers, this may just be one more credit score to add to the confusion of how scoring works.
Credit Reporting / Scoring Expert, Chris McConville is the President of Credit Education at CureMyScore.com and founder of myexpertcreditwitness.com where he works as an Expert Credit Witness in both Federal and State Court. With working in the credit and mortgage fields since 1991, he’s dedicated to sharing his knowledge to educate consumers.
