While you know the data that creates the credit score comes from the creditors who you’ve done business with, did you know that your score is actually generated by a mathematical formula owned by just one company? FICO is the analytics software company that is responsible for generating 90 percent of all the U.S. consumer lending decisions through its FICO Scoring model.
The FICO credit score is what allows banks, property managers, landlords, and other creditors to make business decisions every day. The credit score is generated when a consumer’s credit history is fed into FICO’s analytical software that uses the credit data to calculate the credit score. The three credit repositories, Trans Union, Experian and Equifax, each license the use of the FICO scoring model to generate credit scores for use on their reports.
It’s important to understand how credit scores are determined because slight changes in the FICO scoring model can make big changes to a consumer’s credit score, making it higher or lower. A more stringent FICO model will result in more landlord, lender and creditor denials. While a more forgiving FICO model will yield in higher scores and more credit approvals.
FICO has recently announced some big changes to how the credit score is calculated by recently releasing the FICO Score 9. Due to changes in the risk analytics, more consumers are expected to score higher enabling more creditors to approve consumers for loans, leases and purchases.
So what’s different about the FICO 9 Score model compared to the older versions?
- The new FICO Score does not penalize or calculate any negative score effect for paid collection accounts. In past FICO models, even though a collection account was paid off, the fact that it was a collection account would reflect negatively on your credit score.
- The other difference is that new the FICO Score model is sophisticated enough to differentiate between medical collection accounts and general collection accounts. This now ensures that medical collections will have a lower impact on the consumer’s credit score and the level of consumer risk they represent.
Consumers should benefit from the new model. FICO’s efforts to remove paid collection accounts and decreasing the negative effect medical collections on the score is aimed at making the credit score even more predictive of a consumer’s likelihood to repay debt than previous version. The hope is that the new scoring model will also help banks, property managers, landlords, and other creditors to make better decisions as well, diminishing risk and increasing profits by allowing them to approve a wider pool of qualified applicants.