FICO Unveils FICO Score 10 System
The nation’s leader in credit scores will switch to a trended model to better determine credit risk.
FICO — one of the largest credit score providers — is changing several of its products. One, the FICO Score, will see a significant reformulation in both how it is calculated and how it is delivered. The new FICO Score 10 seeks to increase the predictive power of the FICO score by increasing the emphasis on recent financial activities, such as balances on accounts, on-time payment history, and one’s credit debt to credit availability.
As credit scores tend to consider all negative items on a report, a customer’s recent creditworthiness may be drowned out by past mistakes. Likewise, high-risk credit users with many open lines of credit may have a score that does not reflect their levels of risk, as credit scores tend to reward active credit use. FICO is hoping to help mitigate this.
“Clients value the dependability and industry-leading predictive power of the FICO Score,” Jim Wehmann, executive vice president for Scores at FICO, said in a press release. “FICO is a cornerstone for consumer lending decisions. We continuously innovate using the latest, most robust data, while maintaining consistency with previous models to ensure backward compatibility and minimize operational changes required to adopt a new score.”
The new score will look at credit use over a trended 24-month period. This would give lenders a clearer picture of a borrower’s current capability to pay a bill. “Many lenders want to leverage the most comprehensive data possible to make precise lending decisions,” Wehmann added. “By offering a score that taps further into trended data, we’re able to give lenders greater flexibility and predictive power, as well as ease of integration.”
Understanding the Impacts
The new calculation will see half of all credit scores go up 20 points or more, while half will drop. Those struggling with debt, such as student loan defaulters or those who recently filed for bankruptcy, will see a sharper drop in their credit scores than what would have been expected under the previous credit score model. FICO has estimated that 110 million customers will only see a modest change to their scores, if there is a change at all.
With consumer debt is at its historic highest, many households may find themselves burdened under the new calculations. The new model will penalize personal loans, a major driver of the current debt situation. As many borrowers are taking out more debt in the current low-interest-rate economy, the high credit debt burden will likely lead to lower credit scores and a reversal of average FICO scores, which reached 706 in 2019 — a year that marked nine consecutive years of average FICO score growth.
FICO, originally the Fair Issac Corporation, sells lenders data on borrowers’ creditworthiness via its FICO Scores. Per the company’s data, FICO Scores are used in over 90% of consumer credit decisions in the US. However, as FICO Scores do not consider everyday purchase decisions, such as rent or mobile phone payments, and as many minority communities historically had and have difficulties securing credit products, the FICO Score has been accused of being unfair to black, Latinx, and migrant communities.
The new score system is expected to go online this summer.