Earlier this month FICO launched a suite of new credit scoring models called ‘FICO 10’. FICO last released a new scoring model back in 2015 with the release of FICO 9 scoring models. The reason these are referred to as models and a suite of models is that for some time there hasn’t been a single scoring model that is used with FICO offering different models for different industries (for example credit card lenders might use FICO 9 bankcard enhanced). FICO claims that the new models can reduced the number of defaults by as much as ten percent. FICO estimates that roughly 110 million people will see a change in their score, with changes expected to be approximately 20 points in most cases. FICO did not provide a break down of what percentage would see their score increase vs decrease.
- Trended data. Previously FICO scoring models only looked at a consumers current credit utilization (amount of money borrowed divided by the total amount of credit available to them). By using trended data the new models will also take into account their historical credit utilization in the last 24 months. Rising debt levels will be seen as a negative, whereas falling debt levels will be seen as a positive. The main focus will be on revolving debt such as credit cards rather than installment loans such as a mortgage or auto loan. The one issue with credit utilization data is that even if you pay off your credit card in full each month the amount reported to the consumer reporting agencies is not zero in most cases. You can read more about credit reporting dates here.
- Increased emphasis on personal loans. There will be a bigger emphasis put on personal loans, for example consumers who transfer credit card debt to a personal loan but continue to accumulate credit card debt will see a drop in their scores.
Why It Might Not Matter
It’s important to remember that while FICO has released this new scoring model, it doesn’t mean that lenders will be using this new model straight away (or at all). In most cases there’s a lag between when a new model is introduced and uptake and usually this lag period is long (e.g despite FICO 9 being released almost 5 years ago there are a lot of lenders still using earlier models such as FICO 8).