How will FICO Score 9 impact credit scoring? Not as much as you may think!

FICO’s recent release of its FICO SCORE 9 model caused a buzz of conversation among financial circles and even news media.  There are plenty of questions and concerns by consumers and headlines in the traditional news media.  But most people still don’t understand FICO 9 or what kind of impact it will have on credit scoring. 

The following is a combination of data from several sources, but especially ficoforums.myfico.com.

Different banks and lenders use FICO in different ways.  Many of them still use FICO 04 Classic, an older but more widespread scoring model, while others have integrated FICO 08 Classic, the latest version before FICO 9 was released.  This chart shows the 49 different FICO scores along with their corresponding Credit Reporting Agency (CRA) and the version of FICO they most prominently use.  Additionally, it lists the approximate range of credit scores per that specific FICO. 

In summary, it seems that the FICO scores that really matter are still FICO 04 and FICO 08.  FICO Score 9 is expected to shake up the status quo but mostly in the way that collections are differentiated, particularly medical collections.  However, FICO Score 9 will take time to integrate – some expect even a couple years – and Fannie Mae and Freddie Mac aren’t using it to date.  To consumers, realtors, lenders, and mortgage professionals, this means that not much has changed at all.

Please contact us if you have any questions about FICO Score 9 or how to keep a great credit score or make it even better.

FICO's new Score 9 is a win-win for credit reporting accuracy, consumers with medical debt.

This week, the credit reporting giant FICO reported they’re rolling out an update to their scoring model, FICO Score 9.  Once implemented, it will provide a more accurate and fair way to gauge consumer collections for credit scoring.  The highlight of FICO Score 9 is that it will differentiate medical collections from other consumer credit accounts in collections.  Up until now, those two types of accounts were lumped in together once they hit collections – hurting credit scores the same way.  But with a reported 46 million Americans without health insurance and up to two thirds of bankruptcies caused by unpaid medical bills according to the American Journal of Medicine, a change to the way FICO reported and scored those debts was sorely needed. 

Of course the credit company has a goal of assessing and predicting risk of consumer default for future lenders, and unpaid or overdue medical bills have little real-life correlation to default on other consumer debts.  FICO Score 9 will treat them differently, so a consumer’s score won’t be affected as negatively just from medical bills in collections – better representing the accurate risk. 

While more than a third of Americans have at least debt in collections on their credit file according to a study by the Urban Institute, FICO believes the new model will be able to gauge degrees of risk instead of treating all collections the same.

How much will these changes help or hurt a consumer’s score?  If someone had a clean credit profile except for one major medical debt in collections, their score would increase by an estimated 25 points once FICO Score 9 is implemented.  The changes will be widespread, as FICO is the preeminent credit scoring model in the U.S.  90% of consumer lending decisions take FICO scores into account, with 25 of the largest credit card companies, 25 of the largest auto lenders, and tens of thousands of other businesses looking to them for consumer risk assessment and federal compliance.  

“FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently,” said Jim Wehmann, Executive VP at FICO.

The downside?  It will take a while for FICO Score 9 to be implemented – maybe even a couple years, as software and systems are updated.  Also, Fannie Mae and Freddie Mac haven’t adopted this new scoring model as of yet, so the scoring changes won’t benefit consumer lending. 

If you have significant medical bills, accounts in collections, or any questions about FICO Score 9 and your credit score, feel free to contact us for a no-risk consultation.  It could save you big money!

How much will a 30-day late payment drop my credit score?

We all try to keep on top of our bills, but every once and a while there’s a bump in the road and we might miss a payment.  Unfortunately, a 30-day late payment will report on your credit report and lower your score.  How much will your FICO drop?  There are a lot of factors that go into it, which we’ll go over here.

First off, if you realize you’re late on a payment call your bank or lender immediately.  It may not be too late to salvage the situation and keep the late reporting off of your credit report.  Different lenders report on different days of the month, so if you are proactive they might work something out to get you paid up.  Some of the bigger credit card companies, for instance, have their own internal systems of late reporting that will keep the issues out of the credit bureau’s site for longer than you may expect.

However, if the 30-day late does hit your credit score, what damage will it do?  There are five major factors to determine how much your score will drop:

1. How long ago did the late payment occur?
Since credit reporting is set up on a chronological metric, recency of late payments are perhaps the biggest factor in score changes.  Simply put, the more recent the late payment occurred, the lower your score will drop.  As time goes on (and you make your payments responsibly) the negative impact will diminish.  All items report for 7 years, but the more recent the late payment, the bigger the hit.

2. How severe were any late payments (30, 60, 90-day late or charge off?)
Of course a 60 or even 90-day late payment is exponentially worse for your credit score than one 30-day late.  Why? Credit reporting is all about gauging risk, and a 60 or 90 shows that instead of an accident or isolated incident, there is some serious financial trouble and your score will drop accordingly.  Avoid a 90-day late payment at all costs.

3. How many accounts have had late payments?
If you only have one account with a late payment or payments, it will hurt your score less than if you have missed payments scattered over multiple accounts.

4. What kind of account is it?
A 30-day late payment on a mortgage loan might hurt you more than on a store retail card with a $200 credit limit.

5. Length of history.
Accounts that are well seasoned – that have been open and in good standing or a long time – will take less of a hit than newer accounts.  Remember that payment history comprises up to 35% of your scoring model so these factors are all important.

With all of that said, here is the direct answer:

If you have a 30-day late on your credit report, your score may drop around 80 points if you’re in the 680 range, or up to 90-110 points if you’re 780 or higher.  Counter to common sense, the better your credit score is, the bigger hit it will take if you miss a payment.

Ask the experts: The top 5 questions about credit score.

Why are credit scores so confusing?

Credit scores may seem confusing but once you understand what it is and what parties are involved the role they play, it all becomes clear.  Your credit score shows your history of using credit, including accounts you have opened and closed, credit limits, payment history amounts owed, and defaults.  A credit score is tallied based on these factors and more, so your credit history determines your credit score.

Your credit score is determined by an algorithm developed by the Fair Issue Corporation (hence its other name of FICO score). Three corporations, called “credit bureaus”, specialize in collecting and reporting on financial histories. Those three companies are Equifax, Experian and TransUnion.  While their calculations are secret, we do know that the basic building blocks of your credit score are founded on: Inquiries, Mix of Credit, Age of Credit, Debt Ratio, and Delinquencies. 

How do you get your FICO scores?

www.myfico.com is the only way for consumers to actually get their FICO scores.  All other sites will be "educational credit scores".  Currently costing about $20 per score.

Most of us have been charged to pull our credit report at some time, or go onto one of those “free” sites, only to be hit with a $15 hidden fee to see the full report.  But according to the Fair and Accurate Credit Transactions Act (the FACT Act), you are eligible to receive a free copy of your credit report once each year from each of the three major credit bureaus by going to www.annualcreditreport.com.  This will show your credit history, not your score, but at least you’ll be able to monitor your credit activity and make sure you’re on track.  You can also receive a copy of your credit report through a company like Blue Water Credit or a mortgage lender when applying for a loan.

What does your credit score predict?

A credit score is the statistical prediction of one's likelihood to pay late over the next two years. The higher the score, the less likely one is to have a late payment. The bank then uses this number to assess the amount of risk involved with lending someone money. Banks are a lot like casinos in a sense, they like to place bets where they feel they will win.  Credit scores are trying to predict the same basic thing: the likelihood of a consumer being 90 days late on any payment within the next 24 months.  Credit score isn’t only used for mortgage loans anymore, now insurance companies utility companies, and even employers look at credit as an indicator of timely payments and responsible behaviors.

Why are all three credit scores different?

Determining a credit score is a tricky business since there are many credit scoring models in use, each fitting a consumer into their particular model. Some of the credit scores in these models go up to 990. While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation (FICO) are the most widely used. This score ranges from 300-850.

How many credit bureaus are there?

There is actually 5 bureaus now: Equifax, TransUnion, Experian  are the big 3 we all know of.  Innovis and CoreLogic are attempting to compete but are not recognized by FICO.  Equifax, TransUnion and Experian are the three independent bureaus that each report a consumer’s credit separately and which FICO looks at to create a score.  People often see all three bureaus reported on one report, so they don’t realize it’s not all the same.  Since the bureaus each formulate a FICO score differently, your scores can vary based on credit bureau.

 

Why are all three credit scores different?

You have three different credit scores because there are three major credit bureaus and they each have different algorithms for calculating your credit score.  There are usually similarities but each bureau reports independently so it’s important to monitor and manage each one.  Equifax may have something reported incorrectly while TransUnion has it right, so your scores will vary based on errors, duplicates, and their formulas. Credit bureaus like Experian, TransUnion, and Equifax don’t ever make decisions about if you get credit.  They do, however, collect data about your use of debt and compile a credit score to share that with banks, lenders, or retailers who are considering lending you money so they can better gauge risk.

Answering your important questions about credit repair.

What is credit repair?

Credit repair is the process of trying to improve your credit score.  Lenders use your credit report and credit score in order to judge your reliability as a loan candidate. Your credit report indicates your ability to handle debt responsibly and will help banks decide if you are a desirable loan customer, so cleaning up negative and inaccurate items will raise that score and help you save money.

How is your credit score computed?

Your credit score is determined by an algorithm developed by the Fair Issue Corporation (hence its other name of FICO score). Three corporations, called “credit bureaus”, specialize in collecting and reporting on financial histories. Those three companies are Equifax, Experian and TransUnion.  While their calculations are secret, we do know that the basic building blocks of your credit score are founded on: Inquiries, Mix of Credit, Age of Credit, Debt Ratio, and Delinquencies.

Why is a good credit score important?

A good credit score can save you thousands or tens of thousands of dollars on mortgage loans, credit card interest rates, car and student loans, and even insurance.  Many employers are even now looking at credit reports when screening applicants!

Are there quick fixes and tricks that are guaranteed to improve your credit score? 

No.  Credit repair is an ongoing process of making good choices to manage your debt load and finances responsibly, and then making sure accurate information shows up on your credit reports.  Stay far away from anyone who promises guaranteed results, quick fixes, or tricks.

So how does it legitimately work?

Credit repair is a process of identifying incorrect, misreported, and duplicate items on your report and then sending dispute letters to the credit reporting agencies to challenge the validity of negative information.  The credit bureaus are carefully governed by the Fair Credit Reporting Act that requires them to either fix the problem or respond with evidence that it’s true within a certain timeline.  Either they will fix the inaccurate negative credit item or if they don’t have evidence or don’t respond in time, the item will be removed.  Either way helps your credit score to rise to where it should be. 

Are there really that many errors on credit reports?

You’d be shocked!  The credit bureaus are in the business of selling information first and foremost so duplicates, wrong addresses, misspelled names or aliases, identity theft, and old items that should have fallen off are all examples of the common mistakes that show up.  According to the Consumer Data Industry Association, a trade organization for credit reporting agencies, credit repair disputes account for no less than 30% of disputes received by the credit reporting agencies. 

What are credit repair companies?

Credit Repair companies act as advocates for consumers, doing the hard work and exercising the knowledge to dispute and remove negative items.  Credit repair companies work for the client who hires them for their services. 

Why do so many credit reporting companies have a bad reputation?

Unfortunately, it seems there are a lot of bad companies and services in the realm of finances.  Far too many credit repair companies make claims that are not true, offer guarantees and promises just to collect large fees, don’t represent their clients to the best of their abilities, or claim legal representation when none exists. 

Can you try to do it yourself?

Yes, you can try to repair your credit yourself and write dispute letters to the credit bureaus. 

Why would you hire a credit repair company?

“Trying” it and successfully obtaining the desired outcome are two different things.  A good credit repair agency has the knowledge, experience, manpower, systems, and dedication to achieve the best possible result. 

Think of it like this:  Do you do your own taxes?  Trade your own stocks?  Maybe you do, but most people chose to hire the best possible professional because it’s important enough to get right. 

Other than dispute letters, what else should be included in a responsible credit repair plan?

First, devise an action plan for things you can do to maximize your credit profile; simple adjustments to the way accounts are being reported can have a massive impact on your overall credit grade, and profile.  Next, review your credit line by line to identify items that are potentially reporting incorrectly, items that are outdated, unverifiable, misleading, or questionable.  Assess all of your debts and loans to see what is helping you and hurting you, not only in regards to credit score but in the context of your whole financial picture.  Last, there should be continuing education so you’re never left operating in the dark as you make important decisions about your credit score in the future.

What assurances do you have when you use a credit repair company?

Credit repair companies are prohibited from making promises or guarantees.  They also cannot charge customers until after services have been performed.  Make sure they disclose that you can try to improve your score yourself and follow all state and Federal laws and regulations as laid out in the Credit Reporting Organizations Act.  Good credit repair agencies let you log in or check in at any time to track the exact progress of your disputes and your file.  You will have direct access to a professional staff member who answers all of your questions and proactively coaches you. 

How do you make the best-educated decision and find the right credit repair company?

Check in with the Better Business Bureau to make sure a credit repair agency is registered and in good standing with a good rating, or else do not hire them.  You can also ask them for a statistical range of past results.  This is not a guarantee that you will receive the same thing, but a reasonable range of expectations.  Make sure your credit repair company has a physical brick and mortar office you can walk into if you wish and professional counselors you can call any time.  Ask them point blank if all of their practices are ethical and legal and request documentation in compliance with the FTC and CROA.   

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Do you have any questions or would like more information about credit repair?  Feel free to contact us for a complimentary consultation.