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FICO Scoring Changes And Your Credit Score

The release of a new credit scoring system has been bringing hope among many consumers plagued by old debts, but few really understand much about these changes. Further, the changes may not be as beneficial as anticipated.

Old Scoring System

The FICO scoring system has been operating on its 8th version for quite some time now. The FICO 8 system takes many aspects of your credit profile into account when calculating your score. Ranging from 300-850, the FICO 8 looks pretty much at everything in your credit history both present and old. While this may not sound strange at first, consider these two aspects.

First, old accounts that may have been in collection at one point but have since been resolved are still used in the score calculation. Why would an old collection account that has been paid off matter than much? After all, the consumer did resolve the debt and rid the account of its delinquent, collections status. Supposedly, even one missed payment that ended up in collections flags you as a borrowing risk.

Second, currently owed medical bills also are taken into consideration when evaluating your score. This doesn't sound too outlandish, but consider the person who has otherwise low debt and a positive credit payment history, why should they be punished with a lower score simply because they couldn't afford to pay off a hospital bill in one lump sum. Most medical providers say they are "required" to enter any bills not 100% paid within 90 days into collection. However, there is no such rule. Many people in this category are making monthly payments on their medical bills on time every month, just in a way that fits within their budget and probably doesn't fall within the 90 day pay off. That doesn't sound like they are much of a risk for borrowing.

New Scoring System

The release of the FICO 9 scoring system is supposed to test out the removal of the two issues dragging down many consumers scores faced under the FICO 8. If the scoring system doesn't take into account old, resolved collection accounts or outstanding medical bills, many consumers should see an increase in their scores. Bypassing paid collection accounts and differentiating between medical and non-medical collection accounts should lessen the impact on score for those otherwise in good standing and with a decent payment history. Some consumers could see an improvement around 25 points. For lenders, the FICO 9 is supposed to be a better tool for more predictive score measurements, but many aren't so sure.

Do The Changes Matter?

The bottom line is that lenders cannot be forced to adapt any scoring system. In fact, many mortgage lenders are still calculating scores under the FICO 4 scoring system, which is very conservative compared to FICO 8 and 9. This means that while credit scores from reporting bureaus may reflect higher scores for these consumers some lenders may show different scores based on their calculations, essentially creating no benefit to a consumer that may not be eligible to borrow already. Therefore, industry experts want to caution consumers to dive deeper into their credit score calculations before applying for loans like a car loan or mortgage to ensure they qualify beforehand.