January 15th, 2015 10:27 AM by Jackie A. Graves, President
Halfway through 2014, FICO rolled out a new
model of its credit-scoring system. The new model, which relaxes old system
scorings surrounding certain debts, is predicted to give a slight boost to many
That sounds like good news for home buyers in
need of a credit bump. But just
how much, if any, of an immediate impact will the new model have?
What does the new model do?
In a nutshell, the new FICO model does two
main things to help buyers:
It weighs medical
It does not count paid
collections against you.
Previous versions weighed medical debt heavily
and also weighed paid collections on par with unpaid collections. The new model
can give people with these kinds of debts a bump to their credit score, which
can earn buyers better rates. The median credit
increase for affected consumers is predicted to be 25 points.
That is, if lenders adopt it.
Picking a score
If you didn’t already know, FICO has several
different credit-scoring models, not just one. Lenders pick a FICO model and
use it to evaluate your credit. (Some lenders may use a
Vantage score, the other type of credit-scoring system, but FICO is the
“There is no mandate for what specific model a
lender must use, whether in mortgage lending or other types of lending,” said
Rod Griffin, director of public education at Experian.
There’s no guarantee the new version will be
used by your lender, even if it improves your credit score.
Since the latest model, known as FICO 9, is
still new, don’t expect lenders to already be using it. Griffin said it “can
take months or years for a new credit-scoring model to be widely adopted.”
This is because lenders will compare and test
the new model against their current adopted model and try to gauge how
predicative of risk it is, Griffin said. Furthermore, if
lenders decide to adopt the new scoring model, it doesn’t happen overnight.
Lenders have to undergo a complex process of installing it in their
“That validation and implementation process
can take quite a long time,” he said.
In other words, don’t expect this new FICO
model to have an immediate impact on your purchasing power. There’s no rush for
lenders to switch to the new model. Many are still using, and may continue to
use, older models such as FICO 4 or FICO 8 for qualification purposes.
So, will it help me get a house?
Maybe. If you have a chunk of medical debt and
your credit report has been blistered by paid collections, and you can find a
lender who uses FICO 9, you can probably get better rates, or even break the
qualifying line in extreme cases. Unfortunately, finding a lender who uses FICO
9 may take so long, your dream house could run the risk of falling off the
It’s not a fix-all for people with bad credit, or any kind of boost
for those without medical bills or paid collections.
“Historically, people have not seen tremendous
improvement in their individual credit scores as models change, and I’m
confident that for the vast majority of people, that will hold true in this
case,” Griffin said.
As always, the best way to get good credit is
still to manage your finances,
deal responsibly with your debts and pay your bills on time. And that’s the
best way to get a good mortgage rate.
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