FICO said the latest version of its proprietary credit-scoring formula will place less importance on unpaid medical debts, on borrowers that have little or no credit and on debts that go to collections agencies but get repaid.
"By applying innovative predictive modeling techniques on recent data to capture consumer credit behavior, FICO Score 9 will extend FICO's leadership in providing the credit score that most accurately and fairly defines U.S. consumer credit risk," said
FICO scores are among the most commonly used credit tools in the country, chiefly used by lenders to qualify borrowers.
Experts say that while those changes will help boost credit scores nationwide by at least 25 points in some cases, those scores are only part of a much more complex equation that lenders use when deciding whether to approve a loan. Lenders also take debt, employment history and many other personal and financial factors into consideration.
"It really only will affect a sub-segment of a sub-segment of the market," said
Mortgage applicants with a ding on their credit score typically are charged higher rates by lenders.
For example, Gumbinger said a borrower with a 679 FICO score and a 10 percent down payment could be charged a 2.25 percent fee to access today's best rates, which now stand about 4.125 percent. But because that fee might be hard for the borrower to cover out of pocket, many will instead choose to incorporate the fee into the interest rate, raising it to 4.625 percent in Gumbinger's example.
FICO has learned that people with medical debt that has gone to collection aren't automatically a higher credit risk, company spokesman
"Our research told us that unpaid medical collections, if that's the only negative on someone's credit history, is not an indication of them being in trouble or unable to repay a debt," Sprauve said.
The changes are expected to be rolled out this fall, but Gumbinger said there's no guarantee lenders will adopt the new standards anytime soon, and that many mortgage lenders are using previous versions of FICO's scoring models. There are also competing scoring models that can be used by lenders.
"Your credit score is just one aspect or piece of a puzzle when it comes to your loan being approved," McGlynn said. "But over time, they add up."
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