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New FICO Scoring System Seeks to Increase Scores

NationalMortgageProfessional.com
Aug 12, 2014

FICO has announced that the new FICO Score 9 introduces a more nuanced way to assess consumer collection information, bypassing paid collection agency accounts and offering a sophisticated treatment differentiating medical from non-medical collection agency accounts. This will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent. These enhancements help lenders because they result in greater precision. At the same time, the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points. FICO has used sophisticated modeling techniques to make the new FICO Score 9 more predictive of a consumer’s likelihood to repay a debt than previous versions. This latest version of the FICO Score captures recent consumer behavior to give lenders better risk assessments across the credit lifecycle and all credit products. It will be available to lenders through the U.S. credit reporting agencies starting this fall. FICO Score 9 also supports the desire of lenders to better assess the risk of consumers with limited credit history—so-called thin files. In the model development process, FICO data scientists represented a consumer’s repayment behavior in degrees of risk. For example, instead of classifying a consumer as someone who paid or didn’t pay her bills in absolute terms, the various degrees of the consumer’s payment history have been quantified. The end result is a score with an improved ability to assess the risk of thin files. “FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently,” said Jim Wehmann, executive vice president for Scores at FICO. “By applying innovative predictive modeling techniques on recent data to capture consumer credit behavior, FICO Score 9 will extend FICO’s leadership in providing the credit score that most accurately and fairly defines U.S. consumer credit risk.” FICO Score 9 assesses consumer credit risk on all credit product lines—mortgages, auto loans, credit cards and personal loans—and can be used across the entire customer credit lifecycle, starting with marketing/pre-screen, originations and account management, all the way through early-stage collections. FICO’s innovative, multi-faceted modeling approach incorporates a more exhaustive characteristic selection process to build a score that is even more effective across a wide variety of situations. This approach also uses the Multiple Goal Scorecard technology of FICO Model Builder, which balances a traditional risk metric evaluating all accounts with one evaluating originations risk across all product lines, such as mortgages, credit cards or auto loans. “The advances in FICO Score 9 provide significant incentives for lenders to upgrade from earlier versions of the FICO Score,” Wehmann said. “U.S. lenders can more consistently and precisely assess new applicants and existing accounts with a more robust credit score built on the most current credit data available, while minimizing operational hurdles associated with adoption and compliance. We stand ready to help lenders make that upgrade as smoothly and quickly as possible.” Future scores in the FICO Score suite will build on FICO’s expertise in analyzing a broad spectrum of data types, as well as its keen understanding of client needs and consumer behavior. These scores will be developed to reliably assess the creditworthiness of even more people.
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