The new model will used to identify borrowers who appear more creditworthy than they really are. While the new versions of the FICO score are coming, it doesn’t necessarily mean bowers will have a harder time getting a loan. Fair Isaac Corp., will roll out two new credit scores this summer, the FICO Score 10 and the FICO Score 10 T.
The changes FICO is making to its credit-scoring model could mean a bigger gap between consumers with good credit and those with poor credit. People who already have high FICO scores will likely get an even better credit score under the new system. But people who struggle to pay lenders on time will see more significant declines in their scores than under previous versions of FICO.
The phrase “FICO score” can be applied to a wide range of different scores produced by the company. Every few years, FICO produces a new version of its credit score — FICO 8 was released in 2009, while FICO 9 came out in 2014 — but lenders can choose to use an older version. FICO 8 is the most commonly used model today.
FICO expects lenders to begin adopting the new models by the end of 2020. A spokesman acknowledged the transition can be a challenge, particularly for large lenders. “When we release a stronger more predictive model we see that lenders will migrate to the stronger model because it allows them to make more loans to more consumers without taking more default risk,” says Dave Shellenberger, vice president of scores and predictive analytics at FICO
“Within the mortgage world, we use a model that’s Fannie Mae-compliant,” said Jared Maxwell, direct sales division leader and vice president at Embrace Home Loans, based in Rhode Island.
Fannie Mae and Freddie Mac require lenders who want to sell them loans to use a FICO score whenever a usable score is required. Lenders get these scores from the three credit bureaus — Equifax, Experian and TransUnion. None of the bureaus use the latest version of FICO for this purpose. They use FICO Models 2 (Experian), 4 (TransUnion) and 5 (Equifax).
After taking these three scores, Fannie and Freddie direct lenders to use the middle score for underwriting. If only two scores are available the lower score is used. Mortgage lenders also consider other factors than a person’s credit score, such as their debt-to-income ratio, and such things as delinquencies.
While the core criteria generally will remain the same from FICO score to FICO score, each version is different. For instance, with FICO Score 9, rent payments, when available will be factored into the score. Medical debt will be weighted less than with previous versions.
FICO Score 10 will weigh personal loans more heavily, penalizing borrowers who consolidate debt with personal loans and then choose to rack up more debt.
As for FICO Score 10 and 10 T, there are a couple of key changes being made. The scores will weigh personal loans more heavily, the Wall Street Journal reported, in order to penalize borrowers who consolidate other debt with personal loans so they can go rack up more debt.
FICO Score 10 T will incorporate “trended data” for the past 24 months for every borrower, to show the historical trajectory of their credit behavior. This change will reward people who have been working to pay off their debts, but could cause people’s scores to drop if they’ve amassed more debt in that time.
Some lenders use alternative scores. The FICO Score XD incorporates additional data to indicate a borrower’s creditworthiness, such as landline, mobile and cable payments and property data.
The three credit bureaus have also released the VantageScore as a competitor to FICO, which uses the same underlying data, but a different formula to produce its scores.
This news is from various reporters of the Wall Street Journal and Market Watch
Monday I will post more on this subject. Have a great weekend!
Robert L. Woods (a.k.a. R. LaMont W.)