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. In 2016, FICO 9 was introduced to consumers with the main focus of treating paid collections and medical collections more favorably. Big changes were made to FICO Score 9 in the area of debt collection.

What makes FICO 9 different?

Here’s what makes FICO 9 different from older versions:

1. Paid in Full Collection Accounts are Ignored: This means that once you’ve paid off a collection account, it will no longer negatively impact your FICO 9 score. This is a significant improvement from older FICO models, which continue to penalize you for paid and unpaid collections.
2. Less Emphasis on Unpaid Collections Under $100: Small unpaid collection accounts (under $100) are ignored in FICO 9.
3. Improved Treatment of Medical Collections: FICO 9 ignores paid medical collections. This means that if you had a medical debt that went to collections but you eventually paid it off, it won’t hurt your FICO 9 score. Also, medical collections that are with a collection agency have less of a negative impact compared to those held by the original medical provider.
4. Inclusion of Rental Payment History: FICO 9 considers your rental payment history, which can be a big help for people with limited credit history or those new to the U.S. If rental payments reporting to credit bureaus can be beneficial to you, consider asking your landlord to start reporting monthly payments.

Why FICO Score 9 matters

When it comes to medical debt, 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 using FICO 9 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 had wanted. 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 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.

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 was only gradually adopted and it’s been available since 2014. Now we’re on to FICO 10 and 10T. But FICO 8 remains the most commonly used scoring model which does not give consumers a boost in scores.