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New version of FICO is better if you have paid collections (FICO 9)


FICO is the largest credit scoring model used by 90% of lenders. Every few years FICO updates its scoring model and the newest version, FICO 9, might actually help consumers with paid collections and medical collections.

FICO Score 9, has some big changes in the area of debt collection. The scoring model does not include paid collection accounts and it will differentiate medical collection accounts from non-medical debt.

This may be good news for consumers with this type of debt. FICO Score 9 was rolled out in 2016, but it still isn’t being used as widely as its predecessor, the FICO 8.

Why FICO Score 9 matters

In older versions of FICO, collection accounts have a negative impact on a credit score whether that debt is paid or unpaid.

With FICO 9, consumers with paid collection debt are rewarded for meeting their debt obligations. FICO 9 makes a difference in medical and non-medical debt. By differentiating medical from non-medical collection accounts, medical collections will have a lower impact on a score. The biggest problem with medical debt is that it’s unpredictable.

Consumers who typically pay their obligations on time can be totally blindsided by medical debt. Medical debt on credit reports does not accurately reflect a consumer’s normal payment habits. Lenders will have a better representation of the credit risk a consumer poses. The median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.

FICO Score 9 also helps consumers who have “thin files”, something lenders have been wanting for some time now. Consumers with a “thin file” have few if any credit accounts and often do not have a credit score.

Under FICO 9, instead of classifying a consumer as someone who paid or didn’t pay her bills in absolute terms, the various degrees of the consumer’s payment history has been quantified. The end result is a score with an improved ability to assess the risk of thin files.

“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 vice president for Scores at FICO. “By applying innovative predictive modeling techniques on recent data to capture consumer credit behavior, FICO Score 9 will extend FICO’s leadership in providing the credit score that most accurately and fairly defines U.S. consumer credit risk.”

This change was most likely a response to another credit scoring model, VantageScore. Although not nearly as widely used by lenders, the VantageScore credit scoring model has gained traction because of its more lenient treatment for consumers with “thin files.” FICO 9 directly competes with VantageScore’s treatment of new borrowers who may not have a credit score.

3 primary items that FICO® Score 9 treats differently

  1. Medical Collections. About 43 million Americans — around 1 in 5 who have credit reports —  have medical debt, according to the Consumer Financial Protection Bureau. FICO’s latest scoring model gives that debt less weight than, say, credit card debt. Also, unpaid medical bills sent to collections agencies will have less impact on FICO® Score 9 credit scores than nonmedical debt.
  2. Paid Collections. Any paid in full collection account is disregarded in score calculations. This gives consumers a chance to raise their FICO® Score 9 credit scores despite having debts on their record. This change can also act as an incentive for consumers to pay off their outstanding debts. FICO® Score 8 doesn’t differentiate between medical and non-medical collections and doesn’t ignore paid collection accounts.
  3. Rent Payments. With FICO® Score 9, rental payment history is factored into the score when a landlord reports the payments to one (or all) of the credit bureaus. This formula change can be helpful for those who have just started establishing a credit history because it provides lenders with another factor to review when making their lending decisions. If rental payments reporting to credit bureaus can be beneficial to you, consider asking your landlord to start reporting monthly payments.

Will lenders use the new FICO 9 scoring model?

The problem with FICO and other credit scoring models like VantageScore is that lenders get to choose which scoring model they use. There is no mandatory adoption of new credit scoring models. It took lenders a few years to fully adopt FICO 8 version and it came out in 2009.

FICO® Score 9 is only gradually being adopted. Currently, FICO Score 9 is being used by hundreds of lenders and eight of the nation’s top 10 lenders have either evaluated it, are in the process of evaluating it or plan to do so, according to FICO’s Tommy Lee, a principal scientist at FICO. As of 2019, 

FICO 8 remains the most commonly used scoring model. Lenders’ testing of the new model could take years, so it may take some time for them to fully adopt FICO 9. But, when they do; consumers with paid collection debt and medical collection debt will benefit.

The scoring formula changes may give consumers a boost to raise credit scores.

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