In late January, Fair Isaac Corporation — the creators of the FICO score — announced they’ll update their scoring model this summer. Called FICO 10, the company’s newest revision will impact an estimated 110 million consumers. But how will this change affect you?
First, a FICO primer
FICO isn’t just one score, like those produced by the four major credit bureaus Equifax, Experian, TransUnion, and Innovis. The FICO folks actually offer a wide range of scores based on data gathered from these credit report agencies. The two major categories of FICO scores are “base” (ranging from 300 to 850) and “industry-specific” (which can be up to 900). Most lenders use one of the base FICO scores.
FICO introduced its first credit risk score in 1981, and has updated its formula every three to four years. The latest revisions were in 2009 (FICO 8) and 2014 (FICO 9). Incidentally, FICO 9 added rent payments — when available — to its credit risk model.
Like different versions of computer operating systems, lenders can continue to use older FICO models if they wish. In fact, the three legacy credit bureaus use versions 2, 4, and 5, and the most popular version among lenders is 8.
FICO 10 changes
The biggest change to the FICO model with 2020’s update is how personal consumer loans are treated. According to an NPR report, personal loans are the fastest-growing consumer debt category. Currently, Americans owe about $300 billion in personal loans. Many consumers use a personal loan to consolidate other unsecured loans, like credit card debt.
FICO 10’s model will break out personal loans into a distinct category. It will also look back on a consumer’s history to determine if they have actually lowered their high-interest debt or have amassed new credit card balances. This formula isn’t likely to impact consumers who use debt wisely. In fact, they could see their score go up a few points, especially if they don’t carry a credit card balance month-to-month.
However, the FICO update could hurt consumers who are already in trouble with personal loan and credit card debt. They might even see their scores decrease by double digits.
Will this impact data furnishers?
How this upcoming change impacts you as a company that extends non-traditional credit or as a data furnisher will vary. You’d see the biggest difference in pre-qualification credit checks, and whether you use FICO, VantageScore, or another option.
If you use FICO, you’re under no obligation to update your system to FICO 10. Remember, most lenders are still using FICO 8. If you don’t switch to FICO 10, the consumer reports you pull won’t be impacted by the new model. Of course, if you update to FICO 10, you might see lower scores for those with a lot of personal consumer loan and credit card debt.
The FICO change won’t affect the way you report credit to the bureaus. You can still submit your customer’s payment data to the four major credit bureaus with the help of a credit reporting service like Datalinx. If you’re in an industry that extends credit, but doesn’t traditionally report payments, reporting can help your customers or residents improve their scores.
If you have any questions about reporting credit data to the bureaus or any credit-related topic, just send us a message or give us a call. We’re happy to help!
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