For consumers with collection accounts on their credit reports, FICO Score 9 — the new version of FICO scores that will be available to lenders in the fall of 2014 — can’t come fast enough.
FICO 9 will ignore paid collection accounts, giving consumers with past credit problems a real shot at rebuilding their credit if they can resolve their debts. It will also give less weight to medical collection accounts than it does to other types of accounts in collection. This can significantly benefit consumers who have otherwise paid their bills on time but ran into a problem with a doctor or hospital bill.
But just because the new model is available to lenders doesn’t mean it will be used by them. The process of switching to a different version of the score isn’t like a simple computer program update where you just click a button and update to the latest version in a few moments. It’s much more complicated than that.
The new score will become available in the fall of 2014 through each of the credit reporting agencies. Lenders who decide to try those scores will go through a testing process before they decide whether to adopt them. Barry Paperno, who worked at FICO for many years, explains:
“(Lenders) begin to test it on their portfolios through a process called ‘validation’ to help determine when, and if, they choose to go with the new score,” he says. “Briefly, validation consists of looking at past credit decisions and customer credit performance using both the FICO version used in the initial decision and a ‘what if’ scenario using FICO 9. If, from this analysis, it looks like FICO 9 would have done a better job of weeding out more poor performers than the score they used, the lender may decide the possible reduction in future losses will be worth the resources required to switch to FICO 9. If, on the other hand, the validation shows FICO 9 not appearing to provide any increased risk prediction value, then they’re likely to stick with what they’re currently using.”
This process takes time and can be costly for lenders, who like any business, may have other priorities. This is not a “free update” either, so budget constraints may be a factor as well.
The other issue is that FICO scores, when they are used, are just one part of the approval process. “Many of the large banks use their own custom proprietary scoring models in which FICO scores are just one of many components,” Paperno says. “Making changes to these complex scoring systems, as would be required by a change to FICO 9, is no small logistical feat.” In addition, a lender reviewing a credit report would still be free to question collection accounts or decline applications from consumers whose credit reports contained one or more of them.
We frequently hear from consumers who say they want to clean up their credit to buy a home. And often they believe that part of that process means paying off collection accounts. Unfortunately, they may be surprised to learn that simply paying a collection account usually doesn’t boost their credit scores, or allow them to qualify for a lower rate home loan.
Most mortgage lenders make loans that conform to the requirements of Fannie Mae and/or Freddie Mac, so that those loans can later be sold on the secondary market. The FICO scores accepted in Fannie Mae’s Desktop Underwriting, a widely used automated underwriting system, are from the standard FICO credit scoring model developed before FICO 8 — which until now has been the most recent version of the FICO score and was introduced in 2008.
It’s unclear when these new standards will begin to impact the mortgage industry. Ultimately each lenders’ system for evaluating and approving loan applications is their own secret sauce, and they get to make the final decision as whether to say yes or no. As long as they don’t break any laws regarding discrimination, they get to decide how to make that decision.
Keep in mind that some lenders also use VantageScore credit scores, and the latest version — VantageScore 3 — already ignores paid collection accounts.
What You Can Do
All this means that consumers must continue to be proactive about their credit, and make sure they are taking steps to build and maintain strong credit. That includes the following:
- Check your credit reports from all three major credit reporting agencies at least once a year for accuracy and to see whether collection accounts have been reported.
- Check and monitor your credit scores (you can see two of your credit scores, including the VantageScore 3.0, at Credit.com) so you understand where you stand and will be alerted early on to changes or problems.
- Work on the things you can change, and try not to stress about the ones you can’t. For many people, paying down debt and paying on time going forward can help their scores over time.
But don’t expect major changes in your scores overnight. “If the past is any indication, don’t expect lenders to adopt FICO 9 too quickly,” Paperno says.
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