A New FICO Credit Score Is On Its Way

Steve Williams

Site Founder, Site Co-Owner, Administrator
By Christine DiGangi | Credit.com

FICO announced Wednesday it would release its latest credit scoring model, called FICO Score 9, this summer. As with all credit scoring formulas, the idea is for this FICO Score 9 to be the best indication of consumers’ creditworthiness.

Credit scores are predictive models that help lenders decide whether or not to approve a borrower for credit. To simplify what’s really a much more complicated formula: Credit scores are numbers that represent your credit history, and how high or low those numbers are tell a lender how likely you are to repay the loan on time and in full. As the lending landscape changes, like it has in the past several years, a new formula may be more useful to lenders than existing ones.
“The lending marketplace has changed dramatically in the last few years,” said Anthony Sprauve, senior consumer credit specialist for FICO. “It’s become a lot more complicated to evaluate a consumer’s risk.”

What Goes Into Making Credit Scores

There are a ton of different credit scores out there. Some are used by lenders, others are for educational purposes, and each one weighs various aspects of your credit history differently.

The last time FICO released a new scoring model was in 2008 (FICO Score 8), but a new scoring model involves a lot more than a release date. The development of new scores takes years of building a better broad-based model from scratch, allowing lenders to adopt it and also releasing an entire suite of product-specific scores (there are FICO scores for auto loans, mortgages, student loans and so on).

Getting the new score out into the marketplace takes a while, too, said Barry Paperno, who has worked in the credit industry for more than two decades. He described it like the release of new software. When a new version of a program or the latest smartphone comes out, not everyone rushes to replace what they have. There are a lot of things to weigh in such a decision, like if the cost of adopting new technology will be a significant improvement over what you’re working with at the moment.
With credit scores, it’s more complicated than getting a new iPhone.

“These scores are embedded in their systems pretty deeply,” Paperno said. “It’s a pretty disruptive process. This is where the validation comes in.”
By validation he means the lenders will try out the scores on a segment of their portfolios, to see if the new model is truly more predictive than the model they’re currently using. It’s a slow process, and not everyone goes with the latest model released about every 5 years (much like not everyone gets the newest generation of iPhone — people often keep what works until it doesn’t).

What New Scores Mean for You

If the idea is for credit scores to help lenders make better decisions, you may be wondering what this new model means for you as a consumer. Frederic Huyng, a senior principal scientist for FICO, said new models tend to more definitively separate responsible credit consumers from the irresponsible. The score range stays the same (300 to 850), and the tiers within them stay the same (excellent, good, fair, etc.), but where you fall may change.

“Most of the consumers out there are responsible,” said Huyng. “Most consumers tend to score higher when we have new scores.” The reciprocal idea, of course, is that so-called irresponsible consumers may end up with lower scores with a new model.

Huyng also noted that while FICO supports the idea of scoring more consumers, FICO Score 9 sticks to the same parameters as the FICO Score 8. In order for consumers to be scored, they must have at least one trade line on their credit reports that is at least six months old, and they must have at least one trade line that has been updated within the last six months. Other scoring models reach further back into a consumer’s credit history and therefore score more people. The VantageScore 3.0 formula, for instance, goes back two years.

Huyng said more details about the new score will come out as the release gets closer. If you want to see where your credit currently stands, the Credit Report Card will show you two of your credit scores, including your VantageScore 3.0, and an overview of your credit — for free.
 
Soon you might ignore your credit score every month

By Kaitlyn Wells, Market Watch

Are truly free credit scores on the horizon? Maybe, if credit-card companies heed the suggestion of the government that they should provide all consumers with free access to their credit scores.

Last week — more than a decade after the Fair and Accurate Credit Transaction Act of 2003 made it possible for consumers to receive a free credit report once every year from each of the three national credit reporting agencies — the Consumer Financial Protection Bureau urged the nation’s top credit-card companies to make credit scores readily available to consumers free of charge.

Richard Cordray, director of the CFPB, the watchdog agency created in the wake of the 2007-08 financial crisis, sent a letter to the top executives of the nation’s largest credit card companies requesting that they provide the scores after the agency released a report which found that accuracy issues are No. 1 on the list of credit-reporting complaints received from consumers.

Nearly three-fourths of those complaints were regarding incorrect information appearing on credit reports — anything from minor spelling errors to credit damaging delinquent account details in the wrong name, the report found. And credit-reporting complaints are the fifth-most problematic financial category (after mortgage, credit-card, debt collection, and bank account complaints), according to the report.

Worse, errors can go unnoticed for years, as fewer than one in five Americans checks his or her credit report annually, reports the CFPB. “Making consumers’ credit scores freely available on their monthly statement or online makes it easier for them to spot problems with their credit report,” Cordray said in a release.

Brigitte Madrain, a professor of economics at Harvard University, says she thinks changes in how often consumers access their credit reports won’t happen overnight, but that printing the scores on monthly bills would make a big difference. “The good thing about a bill is that it does have to get paid, so there is some hope that scores would get noticed,” Madrain says.

One problem with the plan, critics say, is that there’s more than one score. The FICO score, created by the Fair Isaac Corporation, is probably the most popular (10 billion FICO scores were purchased last year) and is based on information provided by all three credit bureaus. But there’s also the VantageScore, which was created by the three credit reporting bureaus (Equifax, Experian and TransUnion) in 2006, and is also widely used by lenders. And there are at least 11 other credit scores promoted on various websites. Plus, with 36 billion pieces of credit reporting data flying throughout the ether, any given score can change rapidly. There’s an average of 15 changes to a credit file each month for every consumer.


While the letter doesn’t specify which score companies should use, it points out that some credit-card issuers have already begun offering free scores.

As it happens, all of them are offering the same score: the FICO score. Thanks to the FICO Score Open Access program, a service for lenders to share previously purchased FICO scores with their customers for free, Discover was able to begin offering FICO scores to some cardholders in November. Barclaycard US and First Bankcard cardholders also receive their scores through Open Access. In total, 25 million cardholders now receive their FICO credit score for free through this program, says FICO spokesman Anthony Sprauve. And Open Access won’t be limited to credit-card companies, he adds. FICO is in talks with major banks, mortgage lenders, and auto lenders as well. “Our goal is that every consumer in America will be able to access their FICO score through the lender,” Sprauve says.

Since FICO doesn’t charge for the Open Access program, it isn’t reaping additional fees from the initiative. But some critics say there could be a long-term goal at play: as FICO scores gain wider exposure, more consumers could seek to buy them.

Perhaps not surprisingly, companies that calculate other scores are concerned about the idea that one credit score might end up dominating the marketplace. “We believe the score market should be competitive and if any one score becomes the de facto score that is provided, we don’t think that’s in the best interests of consumers,” says Norm Magnuson, spokesman for the Consumer Data Industry Association, which represents the major credit bureaus.

But would a “de facto” score emerge? CFPB director Cordray points out that companies that currently include credit scores on statements, like First Bankcard, obtain them in their normal course of business anyway. Thus, whichever credit-score model an institution regularly uses should be sufficient to accommodate the CFPB’s request.

However, the CFPB cares about more than just the three-digit credit score. It’s also requesting that agencies provide educational information to help consumers understand their scores. Barrett Burns, the CEO of VantageScore Solutions — the company that annually validates the VantageScore — agrees that credit-score education is an important factor, as credit scores can get confusing. “They should know more about how credit is extended and how scores work, which then would influence their credit score,” he says.

Behavioral-economics expert Stephan Meier agrees that consumers don’t always know what their credit score means. “Say your score changed from 630 to 620,” explains the associate professor at Columbia Business School. “You might ask, ‘Is that a mistake or a natural fluctuation?’ The score itself is such a complicated algorithm, it’s very difficult to know what change in your behavior affected it.”

Indeed, some financial institutions already provide supplemental information. “There are a variety of ways banks work to educate their customers and help them make the right choices,” said Ken Clayton, the chief counsel of the American Bankers Association, in a statement. “That said, it seems inappropriate for a government agency to endorse one ‘good idea’ as a best practice and seek to impose it on everyone.”

Economist Madrain believes some pushback originates from institutions that are more concerned with their bottom line, rather than their customers. “If you’re a bank and most of your customers have low credit scores, and the way you make money is through late fees, then a highly effective program could cause profits to go down,” she says, pointing out that some financial institutions have been critical of the CFPB since its creation.

Despite the potential for decreased profits, some banks, like Bank of America, J.P. Morgan Chase and Wells Fargo, among others, do at least point consumers to online portals where they can view, manage, and improve their credit scores. Often, these portals link to AnnualCreditReport.com, the hub where consumers can obtain their credit report (though not their credit score) from each of the three agencies once a year for free.

But consumer advocates don’t think it’s enough, and agree with the CFPB’s call. “Consumers shouldn’t have to pay to find out their credit score,” says Pamela Banks, senior policy counsel for Consumers Union, the policy and action division of Consumer Reports, in a statement. “They deserve free access to the same scores lenders use to evaluate how much they pay for credit.”
 

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