The New FICO Score 9

fico 9 scoreThe 2008 recession hit many Americans hard. Three million plus people were subjected to home foreclosure, a number equaling an 84 percent increase from the previous year and a 225 percent jump from two years prior. Though the country has rebounded in many ways, the post recession fallout is still felt by many. American credit card debt is currently exceeding a combined 790 billion dollars, with 20 percent of Americans maxed out on spending limits. The average credit debt per household is over $8,000, with 40 percent of American families annually spending more than they earn.

Compounding this issue is the inordinate rate of non-revolving debt among young Americans. The burden of student loan debt is felt by some 42 percent of Americans aged 18-35. This same group has experienced a decrease in wages every year for the past seven, down nearly $2,500 since 2008. A Millennial with a net worth in excess of $10,400 is wealthier than half of their demographic. Ironically, 80 percent of this age bracket, when surveyed by TD Bank, despite stating obvious levels of disenchantment still very much wanted to someday own a home. 50 percent of the poll’s respondents called homeownership “vital to the achievement of the American dream.” These prevailing sentiments have not been able to prevent rates of homeownership from dropping by over five percent post recession.

Qualifying for a loan to secure a mortgage is looking like a more daunting task by the minute. A glimmer of hope was rolled out early this month however, in the form of the new FICO scoring model: FICO 9. The National Association of REALTORS ® and the Consumer Financial Protection Bureau are owed a measure of gratitude from the American public for the role they played in the implementation of the new FICO 9.

According to the Federal Reserve Board, over half of all bad debts recorded on credit reports are in conjunction with medical bills. Most troubling about that statistic is the frequency in which medical debt is erroneously reported. Accounts often go to collection as a result of miss-communication between the patient and the hospital or the patient and the insurance company. This was the driving force behind the change to the previous scoring model. Now, the consequences of medical debt will be largely reduced. Under the new scoring model, medical debt will be distinguished from non-medical debt. Meaning an increase in many individual scores, FICO has estimated that scores could rise by as much as 25 points per account.

Further benefiting the consumer is how the new model assesses borrowers with multiple accounts. FICO 9 will set aside old debts with zero dollar balances. Individuals with more than one account in collection may enjoy score increases of as much as 50 to 75 points. Thin files, as in those with limited credit history are also set to be judged less harshly. The formula will take a more nuanced approach to assessing those with restricted histories.

The immediate extent of how FICO 9 will enhance scores will not be known for some time and while the new scoring model perhaps only represents an incremental difference, consumers should known the less enjoy the small victory of having medical debt separated from non-medical debt in their credit profile.

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