What the newest credit scoring model means for you
FICO – probably the nation’s most prominent credit score provider – revealed the details of their new FICO 9 scoring model all the way back in 2014. Lenders have been slowly adopting the new model over the past two years and now it’s finally available to the public, should you be interested. So what does this mean for you?
In the short-term? Maybe nothing. FICO 9 is just one of many scoring models, and its usage still pales in comparison to the much more widely used FICO 8 that preceded it. You can’t control what score a potential lender will use, so your best bet, as always, is to continue using credit wisely, avoiding missed payments and using too much of your available credit line.
In the long-term, however, FICO 9 will eventually replace FICO 8 and hopefully some of the key changes in FICO 9 will be adopted by other scoring models, especially as those changes are all pretty consumer-friendly.
Reducing the impact of medical debt
Remember that the purpose of a credit score is to help lenders assess risk. A consumer with a low credit score is considered to be riskier from a lending perspective because they’ve (theoretically) not demonstrated an ability to successfully manage credit. There’s probably a good deal of truth to that if the reason your score is low is because you’ve missed payments or overextended yourself. But what if you had an unexpected medical emergency?
FICO 9 reduces the negative impact of medical collection debts by differentiating them from other kinds of collection debt. Being hospitalized, after all, doesn’t have much to do with whether or not you know how to wisely manage your credit. That’s a key change that should help consumers in the recovery process following a major medical event.
Using rental payments to build a positive history
Timely and consistent mortgage payments have a positive impact on your score. Traditionally, however, timely and consistent rental payments have had no impact on your score whatsoever. FICO 9 changes that by incorporating your rental payment history into your scores calculation, which could potentially go a long way towards helping young consumers build a positive credit history. Keep in mind, however, that this only matters if your landlord actually reports your payments to the credit bureaus.
Disappearing collection debt
FICO 9’s final change may have a significant impact on how you think about repaying old debts. Under this scoring model, collection debts that have been paid in full are no longer factored into your score, which gives a great incentive to clear those debts if you’re able, rather than simply waiting them out.
Just because the collection account is not factored into your score, however, does not mean that the account will disappear from your credit report. It will still remain visible until seven years have passed. Additionally, all negative marks for missed payments leading up to the account going to collections will remain, again until seven years have passed.