How FICO Score 9 Changes Impact Your Credit

Posted by Chris on August 20, 2014

Fair Isaac Corp., the company behind the popular FICO score that is used on consumer credit reports, is going to make some changes to the way the score is calculated. As the FICO score is the most common way that consumers are evaluated for creditworthiness, this means that many individuals could be affected by these changes. Financial institutions typically use credit scores as a way to find out whether they would be willing to lend money to a consumer and to determine what rates to charge the borrower.

fico score 9

Changes to Credit Score Algorithm (FICO Score 9)

In the most recent change to the FICO credit score algorithm, called “FICO Score 9,” certain items on an individual's credit history will no longer negatively affect their overall score. First of all, any account that has been sent over to a collection agency but was paid off will no longer be factored in the score. Furthermore, under the new credit score algorithm, medical debt will now play a lower role when it comes to calculating your overall credit score. This makes sense, as most individuals that have accrued medical debt didn't end up in this position because they managed loans poorly, but simply because they weren't prepared enough to take on a large medical expense.

What this all means is that consumers who fall into either one of these categories will see their credit scores increase. Of course, an increased credit score could bring about numerous benefits to individuals. It becomes less expensive to borrow money, especially in the case of large loans like mortgages, which could allow for significant savings down the road. But it should be known that only those who have had collection items on their credit report that were paid off, or those who currently have medical debt that would be affected by these changes to the credit score algorithm. Other consumers aren't likely to see any significant changes to their credit scores because of it.

Another important thing to consider is that credit reporting agencies or the creators of credit scores don't actually make the decision as to whether they would lend to a particular consumer or at what rates they would. Financial institutions are free to interpret credit scores as they wish and make their own lending decisions based on them.

In theory, banks could “move the goalposts” as a result of this algorithm change and require higher credit scores to qualify for the same loans, but this is unlikely to happen, as the FICO 9 Score isn't going to result in higher credit scores for the entire population. In fact, only a relatively small proportion of individuals are likely to be affected by these changes. Therefore, consumers should do what they have always done and take care to improve their credit score as much as possible, all while shopping for the best rates among different lenders.

Topics: Credit & Debt

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