Fair Issac Corp., the creator of the widely used FICO score, is switching up how it computes credit scores. The new score, known as FICO 9, will be rolled out to the three major credit bureaus this fall. But what does this mean for consumers?
The Good News
Non-traditional credit, such as your residential rental history, will be taken into consideration. This means that consumers who have little to no credit history but pay rent on time will get a boost. Since payment history and the length of that payment history currently account for approximately 50 percent of your FICO credit score, more consumers will have the opportunity to build a positive credit history through non-traditional means.
Medical collections will have a lower impact on your credit score. Previously, all collection debts--regardless of type and if they're paid--hurt your credit score equally. The new version will give you a break on medical debt, which is great news for the millions of Americans with a medical collection on their credit report. According to FICO, scores could rise by a median of 25 points for consumers whose only negative references are medical collections.
Paid-off and settled collections will be ignored. Under the previous FICO model, if you let an account go into collection, your credit score would take a hit for as long as that collection is on your credit report (seven years). Not so with the new version. Now, as long as the collection has a zero balance, it will be ignored.
The Bad News
Lenders determine when and if to use the new FICO score. While the credit bureaus will be making FICO 9 available to lenders sometime later this fall or in early 2015, lenders will ultimately determine when to use the new score. The reality is that it can cost a significant amount of money to change the current automated underwriting systems. Lenders are already under other regulatory pressures and may not have the time or resources to implement FICO 9 in the near term.
Paid-off and settled collections are still on your credit report. While collections with a zero balance will be ignored, those collections will still show up on your credit report for seven years. So while they won't hurt your credit score, lenders may still have concerns about those debts and can choose to penalize you or give you less advantageous terms.
Adrian Nazari is the founder and CEO of Credit Sesame, a leading consumer credit and personal finance website that provides millions of consumers access to free credit scores, free credit monitoring, free credit and identity protection and better ways to save money and manage their finances -- all in one place.