FICO 9 vs FICO 8 – Why The Newer Credit Scores Are Higher
FICO scores are known to be the most common credit scores that help lenders determine a person’s creditworthiness and ability to repay loans. The FICO scoring formula has evolved over the years to incorporate increased ability to accurately gauge the capability of a consumer to be delinquent or default on his credit obligations.
The newest version of FICO scores is FICO 9 that was designed as an advanced version of FICO 8 that was developed in 2009. Another feature that can be noted is that compared to FICO 8, scores in FICO 9 are higher overall. There are a few key reasons for this:There are a few key reasons for this:
More Emphasis on Present Data
Another major affect of FICO 9 is that it gives more consideration to the most recent activity of the consumer than the historical record in comparison to earlier models. In the credit files of most individuals, there is always negative information including, but not limited to, late payments, collections accounts, or even bankruptcies that may be several years old.
However, FICO 8 still includes those past missteps in your score calculation for up to 7 years for most items while FICO 9 is slightly more merciful by reducing some negative entries if you have been a better citizen in the recent past in terms of paying your bills. Focusing more on the present behavior rather than the past sins, FICO 9 benefits those who have proven to be better stewards of their money.
Inclusion Of Rent Payments
FICO 9 also takes into account positive rental payment data which is reflected in the newer versions of credit report. More notably, it also employs on-time rent payments if the rental history is recent enough to demonstrate on-time payments. Because rent payments show responsible bill paying, similar to that of other loans and credit accounts, it can help increase scores for those who do not use a lot of credit but pay their landlord religiously each month.
Approximately 26 million American consumers are either “credit invisible” which means that FICO cannot calculate a score for them as they lack sufficient credit history. Especially for such individuals, the inclusion of positive rent payment information will help give a more accurate representation of the subject’s creditworthiness, which may include higher FICO 9 scores.
Student Loan Category
Earlier editions of FICO do not distinguish between latest payments while determining the scores. However, FICO 9 introduced a new category for student loans that considers the nature of student loans as a form of credit. It enables 30-180 days late student loan payments to impact the scores less negatively compared to the non-student loan delinquent payments.
This shift also recognizes the reality of today’s consumer carrying student loan balance with them while also recognizing the benefits of income driven repayment plan that is exclusive to federal loans. As more borrowers either delay their payments or pay less based on their current income, FICO 9 attempts to distinguish between short-term difficulties and purposeful default. Hence, the ERR scores do not get as much of a knock depending on the ability to make payments on the student loans.
Medical Debt Differences
Even more people can be negatively impacted by having their credit scores lowered by medical debt that was incurred through no fault of their own for medically necessary procedures. FICO 9 has been designed in a way that is going to reduce the effect of unpaid medical collections on one’s credit score compared to other types of collections. If current medical collections do not make up the majority of total accounts, FICO 9 reduces the scoring impact of unpaid medical collections.
Furthermore, as mentioned the time also plays a factor of charging-off or getting paid the delinquent amount and therefore medical collections more than 12 months old have no impact to FICO 9 score. This much more lenient scoring treatment for medical debt situations additionally helps scores rise under the newest FICO versions.
Review Credit Report Disputes
According to The Fair Credit Reporting Act, consumers have the right to contest any information on their credit reports that is inaccurate or unverified. This is data that gets challenged but if proven right will reduce FICO 8 scores even after the completion of the dispute process. FICO 9 on the other hand completely eliminates the existence of the dispute itself through not taking into account verified disputed data. However, it only measures the veracity of the contents of the data used by the organization.
This is because through legal mandates, the credit bureaus have to undertake a detailed investigation of consumer disputes, therefore more people can forward the disputes to correct credit report mistakes without the worry of suffering a drop in credit score. Excluding score decreases caused by the dispute process contributes to higher FICO 9 scores.
Raise Score Cap
Last but not least, FICO score 9 has a potential maximum score of 900, which is less than the FICO score 8 that has a maximum of 850. Thus, the few consumers with perfect credit records can get an extra 50 points than before. Although an 800 vs an 850 score has little effect on the loan terms available, this wider range of scores enables differentiation at the upper end. They allow lenders to offer the best rate of interest and fast approval for credit that is usually offered to those highly creditworthy borrowers who are least likely to miss or default on their payments.
In conclusion, FICO revises its credit scoring model frequently to provide stronger ties between scores and repayment risks through considering more contemporary consumer trends and credit behaviors. Some of these improvements implemented in FICO Score 9 enable consumers to attain higher credit scores than in the previous versions. Hence while continuing to remain up to date and being consistent in paying all your bills, FICO 9 can enable many achieve better score.
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