With the recent rollout of the new FICO Score 9 credit scoring system, many business owners are curious, if not anxious, to know how it will ultimately affect their ability to extend credit to customers. Let’s look at what the FICO system is and is not.
While many people think of FICO as the arbiter of good or bad credit, the reality is much more benign. FICO is credit scoring software that helps to guide the three credit rating bureaus in determining individual scores. FICO Score 9 is just the latest version of that software.
FICO says that the new software is “more nuanced” than previous versions, meaning that there are some changes to how it sees debt in some specific areas. This is particularly the case with medical expenses. FICO Score 9 will be able to differentiate medical from non-medical collection agency accounts. This means that medical collections will have a lower impact on the individual’s overall score.
Another new, significant feature is that the software is now able to bypass collection agency account items that have been paid or settled. This means that the software will no longer deem the mark as derogatory.
Additionally, those with very little credit history will also get their so called “thin files” assessed in less absolute “Paid or didn’t pay” terms and more from a varied degree perspective that looks at overall history.
In theory, these changes should make it easier for business owners to make decisions about extending credit to potential customers. In practice, it remains to be seen to what degree this is true since businesses have their own credit policies and risk evaluation procedures. FICO credit scores and reports guide these policies and procedures, but are not the sole arbiter of them. Fannie and Freddie, the giant mortgage investors. Both use, and have confidence in, FICO scores from model changes dating between 2004 and 2008. According to a recent Washington Post article, both are still in the process of evaluating whether to even use FICO 8, now six years old and the last big, consumer-friendly model change. Neither company can provide timelines on when even that set of earlier scoring advances will become part of its underwriting system, much less FICO 9.
As lenders weigh the costs and benefits and grapple with questions including, will the relatively small improvements be worth the expense and hassles, it remains to be seen what the overall impact of FICO 9 will really be with all the regulatory changes mandated by recent financial reform legislation.
Lex Patterson joined the DAKCS team in 1988. In 2006, he was named President and has worked to cultivate new markets, enhance product offerings, connect people, cut costs, and further DAKCS’ legacy of delivering astonishing customer service. He has a deep interest in technology and the ARM business, but understands that the relationships developed through interaction with people are really how business gets done. An avid fly fisherman, photographer and motorcycle enthusiast, Lex enjoys the great Utah outdoors.