New FICO Scoring Model Could Lead to Easier Credit

Last week, Fair Isaac Corp, the company behind the industry-dominant FICO scoring model, announced that it would be making some key changes to its scoring system in the latest iteration of its model, dubbed FICO Score 9. The revisions, set to take effect this fall, will alter the formulas used to generate the credit scores that are used in 90% of US consumer lending decisions. Among the new changes: 1) the new FICO scores will give less weight to unpaid medical bills and 2) the new scores will no longer penalize consumers who have had their bills settled with a collection agency.

Fair Isaac said that the changes to the treatment of medical collections reflect the lower credit risk that they represent, compared to non-medical collection agency accounts. In fact, consumers whose only major credit blemishes are unpaid medical debts can expect an increase of roughly 25 points on their FICO score, on average, under the new scoring system.

With approximately 64.3 million consumers with a medical collection on their report, as of July 2014, according to credit bureau Experian, these changes are set to have a wide impact. In addition, of the 106.5 million consumers with a collection on their report, 9.4 million had no balance, which would no longer result in a penalty under the new scoring system.

FICO Score 9 also attempts to better assess the risk of consumers with limited credit history — so-called thin files. It attempts to do this by better representing a consumer’s repayment behavior in degrees of risk. Rather than classifying a consumer as having paid or not paid their bills in absolute terms, the new system quantifies the various degrees of the consumer’s payment history, which Fair Isaac hopes results in more accurate scoring.

Though the scoring changes are scheduled for the fall, it may still take longer for consumers to feel their effects, as lenders will take their time transitioning to the new system. While credit card and auto lenders will likely be among the first to use the latest scoring model, mortgages are likely to lag, as the FICO scores used by most mortgage lenders are two versions old.