Credit Score

A New FICO Credit Score Is On Its Way

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Update: August 18, 2014 Read About The New FICO 9 Scoring Model Here

FICO announced Wednesday it would release its latest credit scoring model, called FICO Score 9, this summer. As with all credit scoring formulas, the idea is for this FICO Score 9 to be the best indication of consumers’ creditworthiness.

Credit scores are predictive models that help lenders decide whether or not to approve a borrower for credit. To simplify what’s really a much more complicated formula: Credit scores are numbers that represent your credit history, and how high or low those numbers are tell a lender how likely you are to repay the loan on time and in full. As the lending landscape changes, like it has in the past several years, a new formula may be more useful to lenders than existing ones.

“The lending marketplace has changed dramatically in the last few years,” said Anthony Sprauve, senior consumer credit specialist for FICO. “It’s become a lot more complicated to evaluate a consumer’s risk.”

What Goes Into Making Credit Scores

There are a ton of different credit scores out there. Some are used by lenders, others are for educational purposes, and each one weighs various aspects of your credit history differently.

The last time FICO released a new scoring model was in 2008 (FICO Score 8), but a new scoring model involves a lot more than a release date. The development of new scores takes years of building a better broad-based model from scratch, allowing lenders to adopt it and also releasing an entire suite of product-specific scores (there are FICO scores for auto loans, mortgages, student loans and so on).

Getting the new score out into the marketplace takes a while, too, said Barry Paperno, who has worked in the credit industry for more than two decades. He described it like the release of new software. When a new version of a program or the latest smartphone comes out, not everyone rushes to replace what they have. There are a lot of things to weigh in such a decision, like if the cost of adopting new technology will be a significant improvement over what you’re working with at the moment.

With credit scores, it’s more complicated than getting a new iPhone.

“These scores are embedded in their systems pretty deeply,” Paperno said. “It’s a pretty disruptive process. This is where the validation comes in.”

By validation he means the lenders will try out the scores on a segment of their portfolios, to see if the new model is truly more predictive than the model they’re currently using. It’s a slow process, and not everyone goes with the latest model released about every 5 years (much like not everyone gets the newest generation of iPhone — people often keep what works until it doesn’t).

What New Scores Mean for You

If the idea is for credit scores to help lenders make better decisions, you may be wondering what this new model means for you as a consumer. Frederic Huynh, a senior principal scientist for FICO, said new models tend to more definitively separate responsible credit consumers from the irresponsible. The score range stays the same (300 to 850), and the tiers within them stay the same (excellent, good, fair, etc.), but where you fall may change.

“Most of the consumers out there are responsible,” said Huynh. “Most consumers tend to score higher when we have new scores.” The reciprocal idea, of course, is that so-called irresponsible consumers may end up with lower scores with a new model.

Huyng also noted that while FICO supports the idea of scoring more consumers, FICO Score 9 sticks to the same parameters as the FICO Score 8. In order for consumers to be scored, they must have at least one trade line on their credit reports that is at least six months old, and they must have at least one trade line that has been updated within the last six months. Other scoring models reach further back into a consumer’s credit history and therefore score more people. The VantageScore 3.0 formula, for instance, goes back two years.

Huyng said more details about the new score will come out as the release gets closer. If you want to see where your credit currently stands, the Credit Report Card will show you two of your credit scores, including your VantageScore 3.0, and an overview of your credit — for free.

More on Credit Reports and Credit Scores:

Image: Zoonar

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  • http://www.ovlg.com/blog/author/stacy/ Stacy Barbee

    I don’t find anything new in the FICO score 9. They are using the same parameters only. The score range is also the same. Hopefully, we will get a clear idea once they give more details about the FICO Score 9. I hope the new score model will be good for both the lenders and consumers.

    I was reading an article in marketwatch. According to them, “FICO
    Score 9 will provide best-in-class predictive power across all major
    credit product lines – mortgages, auto loans, credit cards and
    personal loans – from originations through account management.”
    Let’s see how the new scoring model will help to achieve that. Let’s wait till the summer.

  • thoughtfulY

    Who cares what these financial criminals do with the unconstitutional credit scores. Cut up your credit cards and pay for everything in cash.

  • Jack

    I’ve already scored a perfect 850 on the non-industry specific FICO 08 scoring model, and come withing 1-2 points of the max (which isn’t 850) on the similar FICO 04 models. My FICO Classic ’98 score was within 6 points of the max (again, 850 wasn’t the max). Interesting trend for what’s supposedly an improved scoring model each time, especially when one sees how lenient they’ve become in forgiving certain negative credit items in consumer profiles. Vantage Score 3.0 is another example of this trend.

    I’m not alone in seeing my scores jump, as each newer scoring model has allowed most consumers to score higher than the previous model, while lending score thresholds stay the same for approval and interest rate determination. Anyone can see that allows more loans to qualify, and that seems to be the underlying objective of each new scoring model, rather than “improving” scoring effectiveness in predicting loan repayment risk. Is this because large financial institutions, knowing they are “too big to fail” per se, now perceive there’s no REAL risk for them to go under since the government will intervene when things get ugly, and pour capital into their coffers? One wonders…

    With millions of consumers’ credit trashed in the financial meltdown the past few years, I expect the trend to continue. I don’t see that as a positive development with regard to truly gauging individual loan risk. I view it as just another symptom of an ill financial industry addicted to maximizing loan approvals.

    • Thomaso Williamo Startupo

      Good job, Jack!

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