FICO 9: A more forgiving FICO score?

About five years after its last upgrade, FICO has announced the latest iteration of its scoring system: FICO 9.

The new credit scoring system, which will be commercially available to lenders this fall, makes some significant changes in the way FICO handles accounts in collection — and certain consumers will likely find it more forgiving. fico-score-logo

What’s changing?

The current version of the FICO score (FICO 8) doesn’t differentiate between collection accounts. That means all collection debts, no matter what type they are – and whether they’re paid or unpaid – cause equal damage to your score.

Once FICO 9 launches, however, two big things are going to change:

1. Paid-off collection accounts will no longer hurt you: Under FICO 9, if you pay off a collection account so that it shows a zero balance on your credit reports, it won’t hurt your FICO score. Currently, the original sin of letting an account go into collections will punish your score as long as that account remains on your credit reports. But FICO 9 forgives you once you make things right.

2. Medial debts won’t weigh down your score as much: Right now, FICO sees all collection accounts as equal – whether they’re from an unexpected illness that saddled you with crushing medical debt or a shopping spree. FICO 9, however, will give you somewhat of a break when it comes to the former.

Unlike paid-off collection accounts, the new FICO score won’t ignore medical debt. But it will discount it. That means medical collection accounts will drag down your FICO score less than other unpaid collection accounts will.

Why has FICO changed its tune regarding medical debt? John Ulzheimer, credit expert with Credit Sesame and president of The Ulzheimer Group, suspects the Consumer Financial Protection Bureau’s May 2014 report regarding medical debt may have something to do with it. The report found that those with medical debt (as opposed to other consumer debts) are more creditworthy than scoring models suggest. Medical debt is usually related to circumstances outside the consumer’s control and doesn’t necessarily mean someone won’t pay their other bills, the CFPB argued in its findings.

According to FICO’s press release, the new score will also be “the most consistent” across all three credit bureaus, meaning less fluctuation between your TransUnion, Equifax and Experian FICO scores.

What does it mean for consumers?

FICO 9 becomes available this fall (no date has been announced yet), but that doesn’t mean all lenders will adopt it simultaneously. They’ll convert to the new score “in their own time frame,” Ulzheimer wrote in an email, with adoption reaching critical mass only after repeated testing determines the new score accurately assesses borrower risk better than other scores. Some confusion might linger in the mortgage industry, however, as Fannie Mae and Freddie Mac use older FICO models, Ulzheimer says. If they don’t update, that could mean consumers won’t get a break on medial debts and paid-off collections when they apply for a mortgage.

As FICO 9 achieves dominance, however, it will give some consumers’ scores a lift. In its press release, FICO estimates that the median scores of consumers “whose only major derogatory references are unpaid medical debts” will get a 25-point lift.

Still, as Ulzheimer points out, consumers won’t be invincible against credit denials. Some lenders don’t just check your score and call it a day – they’ll peruse your credit reports as well. Collection accounts (medical and paid-off ones) will still be on your credit reports for lenders to see, and they might decide they make you too much of a risk.

Why the new model?

FICO isn’t making these changes to be nice and give consumers a break. The company’s success relies on its ability to accurately determine borrower risk better than other credit scores out there. So it frequently tweaks the criteria that go into its industry-leading three-digit number. The last major update was in 2009, with FICO 8 (which, among other things, changed the way FICO weighs high-balance card accounts). Its changes for the FICO 9 model indicate that it has found that paid collection accounts and medical bills aren’t as much of a risk indicator. So, although consumers might breathe a sigh of relief, it’s lenders that FICO is trying to win over with a more accurate score.

VantageScore, a credit scoring model developed by the Big 3 credit bureaus, made similar changes in March 2013 with its VantageScore 3.0 model, when it announced it would begin ignoring collection accounts with zero balances.

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