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Some big changes are coming to your credit score and credit report. They will not happen as fast as you want, but they have the potential to help improve your credit score. So let's look at everything you need to know.
At the end of 2014, Fair Isaac Corp. introduced changes to its widely used credit score, popular known as FICO. This updated scoring model is known as FICO 9, and has been available for about a year.
So far the transition has been slow. But changes to state and federal laws are helping improve the pace of adoption.
What is a FICO Score?
FICO credit scores are calculated using the proprietary software of the Fair Isaac Corporation.
FICO uses your credit history to score the probability that you will become 90 days late on a credit account within the next 24 months. Your credit score reflects your payment history, outstanding debt, payment history, credit searches, and types of credit.
According to FICO, 90% of lenders check your FICO credit score when making decisions about whether not to extend credit to a borrower. Lenders rate a credit score below 620 as bad credit, between 620 and 680 as average credit, and above 680 as good credit.
What is FICO 9 and How is it Different from my FICO Score?
Much like you need to update your computer software over time, the Fair Isaac Corporation periodically updates the way it calculates your credit score.
In late 2014 the Fair Isaac Corporation introduced FICO 9 as an update from FICO 8.
Most notably, FICO 9 changes the way debt collections impact your credit score.
General Debt Collections Accounts
Under previous FICO scoring models, accounts that had gone to collections for non-payment could continue to harm your credit score even after they had been re-paid. Paying off or settling an account that had gone into collections had no positive or counter-acting effect.
In FICO 9, once an account in collections gets settled or repaid, the model bypasses or ignores that account in the credit score calculation.
Medical Debt Collections Accounts
Many health-related debts are simply the result of delayed insurance payment, insurance confusion, or other billing mishaps. As a result, new regulations require FICO adopt a 180-day waiting period before medical debt gets placed on a credit report.
This policy change protects consumers with medical billing or insurance errors from being denied credit by lenders.
In addition, medical debts that get published on your credit report but are later paid by the insurance company will be removed completely from your credit report.
Until this point, all payments to medical collections accounts would remain on the credit report along with a “paid late” notation.
Limited Credit History? FICO Changes May Help
Not much has been said yet about how the changes will impact FICO scores for consumers with little credit history, but FICO did say it will use a new technique to analyze the creditworthiness of such consumers.
This is an important change because lenders want to get a better idea about these consumers because they are potential customers.
This technique will help lenders evaluate consumers who do not have a bank account, credit card or mortgage, which typically includes young adults, retirees and consumers with lower incomes.
Better Responses When You Dispute Your Credit Report
Other consumer-friendly changes to FICO are also government mandated and will take place immediately.
These include requirements that credit bureaus do a better job of investigating consumer disputes. And they must improve communications amongst the bureaus errors are discovered.
You should even see the credit bureaus employ specially trained representatives to handle disputes involving identity theft, mixed files or fraud. And they must now allow for human intervention when a lender and a consumer disagree about a debt.
Will This Help Me Get a Mortgage?
Unfortunately, lenders will not use FICO 9 for mortgage loan applications.
Mortgages underwritten by Fannie Mae and Freddie Mac still require originators to use a pre-2008 FICO credit-scoring model. That particular credit score is now two generations behind the current methodology.
So, it could be a while before borrowers see any changes or benefits from a FICO 9 credit score.
What Does this Mean to Me?
Although the FICO 9 credit scoring system has been available for about a year, the transition is slow. Lenders are free to upgrade at their own pace, so the transition is a low priority compared to other more urgent regulatory compliance issues.
Fortunately, some of the changes are mandated by law, so you should see them implemented by all lenders over the next few years.
The Fair Isaac Corporation estimates that consumers whose only negative credit reference results from medical collections could see their credit score increase by as much as 25 points in the new FICO 9 scoring formula. Handling collections accounts in this way should also allow many consumers with otherwise good credit to qualify for credit they would otherwise not be able to obtain.
Lenders anticipate that FICO 9 should put a considerable number of people into higher credit score ranges that will open the doors for new lending opportunities and better interest rates for those borrowers.
FICO 9 is good news for consumers who continue to be plagued by past collections accounts, particularly medical collections.
Hopefully, the pace of adoption of FICO 9 will increase, as these changes will help consumers get out of debt and get the financing they need in tough times.
Want to Check Your Credit Score Today?
You can get your free annual credit report from each of the three major credit bureaus at AnnualCreditReport.com.
Your actual credit score is not provided free, however. We do provide recommended resources if you want copies of your credit scores here.