FICO update expected to improve credit scores
WILMINGTON, NC (WECT) - Fair Isaac Corp., commonly known for the widely used FICO credit score, is revising its scoring formula. Experts predict the result will improve credit scores for some groups of consumers.
Patrick Stoy, President of Marketing Consulting Mortgage in Wilmington, said consumers will notice three major changes to the latest generation of FICO, known as FICO 9; medical debts, non-traditional credit checks and the removal of settled collections.
"The first is that medical debt will not carry as much weight anymore," Stoy said. "Right now if you have medical collection, it can really hurt your score because of that one thing that was out of your control."
Previously, all collection debts were equally damaging to a consumer's credit score, regardless of the type.
Consumers who let one or more of their accounts fall into collection would see their credit score knocked down significantly even if they paid or settled their debt. However, FICO 9 will ignore any collections that have a zero balance even though they will still appear visible on consumers' credit reports for seven years.
Stoy said the last noticeable change to the score will affect a large number of young people freshly out of college who have not built up any form of credit. He said the older FICO model perceived a borrower's lack of credit to be a red flag, but now lenders will be able to track nontraditional methods of credit that many young people already use.
"Now, we can actually start putting trade lines on the credit bureaus including your insurance, cell phone and the other normal things that people have as soon as they come out of college," Stoy explained.
Stoy said it's more important than ever now to pay bills on time because FICO will take this into account when monitoring non-traditional credit lines.
"The credit scores in almost any industry effect what kind of interest rate you'll get, which of course is what your payment is," Stoy said. "So, an interest rate is really just a risk factor. The higher your credit score, the lower the interest rate you're going to qualify for."
He hopes the newest generation of FICO will lead to more qualified home-buyers in Wilmington and predicts consumers won't notice any changes to their scores until at least spring 2015.
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