Using a new algorithm designed to better predict borrowers’ credit worthiness, FICO has released an updated scoring model aimed at helping lenders reduce their default rates and better tracking consumers’ payment habits.
The new scoring model, FICO Score 10 Suite, incorporates a comprehensive database of trended credit bureau data to offer lenders enhanced predictive power in credit decisions compared to previous FICO Scores, according to a company press release. The suite will be available this summer and is comprised of two components – FICO Score 10 and FICO Score 10 T.
“Many lenders want to leverage the most comprehensive data possible to make precise lending decisions,” FICO Executive Vice President for Scores Jim Wehmann said in the release. “By offering a score that taps further into trended data, we're able to give lenders greater flexibility and predictive power, as well as ease of integration.”
FICO estimates that mortgage lenders could reduce defaults on newly originated mortgages by as much as 17 percent using the new scoring system. The company also asserts that lenders could reduce the number of defaults in their portfolio by as much as 10 percent among newly originated bankcards, and 9 percent among newly originated auto loans, by adopting its new scoring model in place of FICO Score 9.
The company noted that its new score is backward compatibility to previous FICO Score versions to ensure continuity, ease of use and stability for lenders and investors. Lenders can more easily transition to FICO Score 10 because it includes standard FICO reason codes, a similar odds-to-score relationship as prior versions and consistent score ranges.
“Clients value the dependability and industry-leading predictive power of the FICO Score,” Wehmann said. “FICO is a cornerstone for consumer lending decisions. We continuously innovate using the latest, most robust data, while maintaining consistency with previous models to ensure backward compatibility and minimize operational changes required to adopt a new score.”
FICO estimates that the new scoring model could cause about 110 million consumers to see a change in their scores of less than 20 points, according to a report by CNBC Make It. The differences between Score 9 and Score 10 will mean that consumers with large debt balances – such as those often associated with student loans and a mortgage – will not be as impactful as consumers’ diligence in managing their debt balances.
“This was bound to happen,” John Ulzheimer, an expert on credit scores and credit scoring, told the news outlet. “The job of scoring models is to properly assess risk, not simply give people better scores as a default position.”
Ulzheimer indicated that FICO’s new score is not necessarily designed to be “consumer friendly” as it breaks from the norm in credit scoring where consumers benefit from the omission of certain sources of debt that can be underlying determiners of credit risk.
“We’ve unfortunately found ourselves in an era where it’s becoming commonplace to water down the breadth of information on credit reports,” Ulzheimer said, noting that tax liens, judgments, medical collections and medical debt have all been removed or delayed from some credit scoring models.
“All of this is great for consumers who have tax liens, judgments, and medical collections ... but it’s not great for scoring models and their users,” Ulzheimer adds. “People with good credit are going to score higher with newer models. People who have elevated risk are going to score lower.”
By using trended consumer data, which considers a historical view of information such as account balances for the previous 24-plus months, FICO aimed to afford lenders more insight into how individuals are managing their credit compared with using traditional credit bureau data.
The FICO Score is the independent standard measure of consumer credit risk used by lenders in more than 90 percent of all consumer credit decisions in the U.S. and is provided free to consumers through hundreds of lenders via the FICO Score Open Access Program.