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Lee Stroh February 27, 2020

Newsletter - February 2020

An estimated 110 million Americans will soon see a change in their credit score, and for about 40 million of them, the news won’t be good.

Fair Isaac Corp., the company behind FICO scores, announced a new credit-scoring model that will be released this summer. The new scoring system is meant to give a more holistic view of consumers’ financial health, looking at trended data rather than a borrowers’ balance at one point in time.

The FICO 10 Score will take into account consumers’ account balances over the previous two years rather than the static view of recent balances used by the current scoring system. It will also weigh delinquencies and utilization ratios more heavily than previous models.

"Looking at consumers’ profiles over 24 months can give us a greater sense of their financial stability," said Dave Shellenberger, Vice President of Product Manufacturing at FICO.

Perhaps most notably, the new FICO score will be more heavily anchored to personal loan data. Since 2015, the number of personal loans has gone up by 42%, making it the fastest-growing type of debt in the United States.

So under the new scoring system, borrowers with personal loan debt, high utilization ratios, and late payments can expect to see a drop in their credit rating.

The roughly 70 million consumers who are managing their debt wisely can expect to see their scores increase, however.

"Anytime a scoring model is more accurate, it’s better for consumers because there’s a lot of consumers who aren’t getting the credit score they deserve," said Mat Ishbia, President and CEO of United Wholesale Mortgage. “For example, if someone has a 690 but really should have a 700 they’re missing out on lower fees and rates that the higher credit score would get them.”

 

The best news, however, is for lenders: Experts believe the new FICO score could reduce defaults by 10% on new-origination financing for bank cards, 9% for auto loans, and a whopping 17% on newly originated mortgages.

But the mortgage industry — the bulk of which currently uses FICO Score 4 — probably won’t be implementing the new model anytime soon. At least, not until government-sponsored enterprises (GSEs) do.

"One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk," Federal Housing Finance Agency (FHFA) Director Mark Calabria said last year, when the FHFA issued its final rule on credit scoring models. In that rule, the FHFA permitted GSEs to use their current model through November of this year.

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