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 Huynh, 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 Huynh. “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.
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