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By G. Steven Bray
Fair Issac Corporation is poised to release a new FICO credit scoring model, and for about 40 million American, the changes could cost them money. The new model, FICO 10, will score consumers more strictly for late payments and rising debt levels.
Fair Issac says the new model will help lenders reduce defaults by up to 10%, but for consumers who see their scores drop, it could mean they receive higher interest rates if they qualify at all.
The company says it has further integrated trended data into the model, meaning the models consider not only a consumer’s current account status, but also the account’s payment history for the last 24 months. This should help consumers who are paying more than the minimum monthly payment to reduce their debt. On the negative side, the new model will treat personal loans more harshly, which could hurt consumers who use those loans to consolidate credit card debt.
If you’re planning to buy a home this spring, take a deep breath. It’s highly unlikely you’ll encounter the model while applying for a mortgage. Most of the mortgage industry is stuck in a time capsule – using FICO 4, a model released in 2004. Changing the model requires approval from the Federal Housing Finance Agency, which moves at glacial speed.
While that may sound like good news, keep in mind that FICO 4 has its own issues. FICO 4 scores, what I call “mortgage scores,” tend to be lower than just about any scores available to consumers. Fair Issac has improved its models over the years in ways that also help consumers, and none of those changes are available for mortgage applicants.