New Credit Score Could Help Millions, Eventually

Why So Slow?

If FICO 8 can help millions of people with small delinquencies improve their credit and help lenders make better decisions, why hasn’t it been implemented yet? A lot of it has to do with the complexity of modern banking, Quinn says. Just pick up one of the hundreds of credit card offers you receive in the mail every year. Before mailing you that envelope, the bank had to decide what type of borrowers it hoped to attract, how many of them were likely to respond, what ratio of those would actually qualify, how much they could be expected to borrow, and how much all of that would bring the bank in terms of costs and profits.

The assumption underlying all those decisions is how to determine a consumer’s creditworthiness. Change that assumption, and everything else has to change, too.

Before banks can change to a new credit scoring model, “they have to get sign-off from compliance, finance, marketing, treasury legal” and other internal departments, Quinn says. “It’s a question of how it affects their business.”

Put another way, big ships don’t spin on a dime.

“We are pleased with the progress achieved to date, particularly since it often takes a lender more than a year to validate and implement a new score version simply due to the number of steps and magnitude of the work involved,” Sprenger says.

Then there’s the little issue that the world economy was shaken to its knees in 2008, and the recovery since then has been slow and unsteady.

And in the mortgage market the two dominant players, Fannie and Freddie, both went bankrupt since FICO 8 was introduced. Now they’re fighting for their lives, since many Republicans and some Democrats in Congress believe both companies should be liquidated.

It’s understandable that adapting to a new credit scoring model isn’t exactly the top item on Fannie and Freddie’s “to do” lists.

“Fannie and Freddie have had a pretty rough road lately, much of it their own making, so they have a lot of house to clean up before they get to new scoring models,” Hendricks says.

Besides, many lenders may simply feel that if the scoring model isn’t broken, don’t fix it.

“The focus on evaluating a new FICO score became lower because they had other priorities, and the FICO score they had works,” Quinn says.

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What Happens Next?

Even though implementation of FICO 8 appears to be going slowly, more lenders continue to adopt it, the company says.

“Many more are in the process of adopting the score or are completing their evaluation,” says Sprenger.

Perhaps the biggest step forward for the new score would be Fannie and Freddie accepting it as their own. That may still happen, but the process is slowed by more immediate problems in the mortgage industry, Sprenger acknowledges.

“(T)hey’re in the process of looking at it among the other priorities they have on their plate,” Sprenger says.

And even after most major lenders have implemented FICO 8, most consumers won’t notice many big changes in their scores. Some people will receive a small boost when small delinquencies are deemphasized. But other factors, including on-time payments and keeping credit card balances low, will go a lot farther toward improving consumers’ credit scores than waiting for FICO 8 to become the new standard.

That may be true even in the mortgage market, which has suffered so much since the housing bubble burst.

“I’m not sure FICO 8 would change mortgages that much,” Hendricks says.

In the meantime, it’s not as though consumers are hurt much by the continued use of older models. As Sprenger says, “Prior versions of the FICO Score remain in use today because they are proven to remain highly predictive over time.”

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