The New FICO Score: Better for Debtors?

If you’ve ever had a debt collector call you, Thursday’s announcement from credit scoring company FICO may be good news for you.

FICO just released the newest edition of its general credit scoring model, FICO Score 9. The big changes come in the area of debt collection: The score will not include paid collection accounts, and it differentiates medical collection accounts from non-medical debt.

These are significant changes for a few reasons: First, medical debt is often beyond the consumer’s control, because unlike an unpaid rent check or utility bill, the consumer may have no way of anticipating healthcare needs or medical bills and, as a result, may not accurately reflect a consumer’s typical payment practices.

In addition, by removing paid collection accounts from the formula, consumers are, in a way, rewarded for meeting their debt obligations. In other scoring formulas, including FICO’s older score versions, collection accounts have a negative impact on a consumer’s score, paid or unpaid.

As is the goal with all credit scoring models, the purpose behind the changes to the FICO score is to better assess the risk consumers present to potential lenders. However, it’s up to lenders which scores they use, and it’s difficult to estimate how quickly the industry will adopt the new model.

The changes in considering collections accounts is similar to a formula currently in use: VantageScore 3.0. That model has grown in popularity, but FICO maintains about a 90% share in the credit scoring market.

“FICO’s announcement today appears to be a competitive response to the traction that VantageScore 3.0 has garnered amongst the largest lenders in the country, and changes to the new FICO model apparently try to remedy many lender and consumer challenges already addressed by VantageScore,” said Barrett Burns, CEO of VantageScore, in a statement to Credit.com.

Whatever the reason, formula changes could be very good for consumers. As score providers aim to design the most predictive models, ideally scores will become increasingly accurate reflections of a consumer’s credit risk, theoretically making it easier for consumers to change their scores through their financial behaviors.

New-score adoption is typically not a rapid process. Lenders tend to test a new model to make sure it serves their purposes better than the model in place, at which point they update their risk-assessment processes to include a new score.

“The advances in FICO Score 9 provide significant incentives for lenders to upgrade from earlier versions of the FICO Score,” said Jim Wehmann, executive vice president for Scores at FICO, in a news release announcing the update. “U.S. lenders can more consistently and precisely assess new applicants and existing accounts with a more robust credit score built on the most current credit data available, while minimizing operational hurdles associated with adoption and compliance. We stand ready to help lenders make that upgrade as smoothly and quickly as possible.

As a consumer, you never really know what credit scoring model a potential creditor will use when reviewing your application, so it makes the most sense to focus on the fundamentals of good credit and increase your chances of receiving a good credit score, regardless of model. An easy way to do this is to review the same credit score over time (checking the same score gives you an apples-to-apples comparison), and as your score changes, you can understand how your behavior impacts your creditworthiness. To see how your actions affect your credit standing, you can get two of your credit scores for free (including VantageScore 3.0) on Credit.com.