Understanding Types of FICO Scores
The FICO scoring system is the standard measure of consumer credit risk in the U.S. and is used by 90-95% of the largest financial institutions to help make lending decisions- but there are different FICO scoring models. Think of it like a 2010 vs 2021 version of the same vehicle. It’s the same car and they both do the same job, but the 2021 model may have heated seats and a GPS. Those changes don’t affect the basic function of transportation. The basic function of the FICO score is to help lenders make more informed lending decisions to reduce their risk of taking losses from unpaid loans. The FICO 9 scoring model was introduced in 2014 but lenders may not have bought it if they were making good lending decisions with their current model. This means that you can have the same credit report on the same day and have two different FICO scores because the lenders are using different FICO models. Here are the main differences between the most used models:
Credit utilization measures the balance-to-limit ratios on revolving debts. All versions of FICO calculate high credit card usage as a higher risk to lenders, but with FICO 8, there’s heightened effect when multiple cards have balances. Each individual card balance-to-limit over 30% can affect your score in addition to overall balance-to-limit calculations. That means that lowering each card balance to below 30% of that card’s limit can help improve credit scores more quickly.
Collection accounts with an original balance less than $100 are ignored. This helps protect scores for consumers who have collections with smaller balances they may not have known about until it shows up on the report.
Having one payment reported as 30 past due meant that you lost a lot of points with previous scoring models since Payment History is 35% of the FICO score calculation. The FICO 8 model will be more forgiving if the 30-day late payment appears to be a one-time incident. Be aware that regularly late payments will cause deeper dips in the score than with previous scoring models.
Non-paid medical bills are treated as less negative than other third-party collection accounts. Research indicated that people with medical collections were still paying their car loans and credit cards and other debts on-time, so medical debts weren’t as big of an indicator of risk to the creditor- which is the whole point of the credit score calculation.
Third party collection accounts stop negatively impacting your score as soon as they are reported as paid. With previous scoring models, it would take approximately two full years to recover after payment.
FICO 9 factors rental history into your credit score. This makes it easier for people with no credit to build a credit score with monthly on-time rent payments. Unfortunately, this is dependent on your landlord actually reporting rent payments to credit bureaus—something not yet seen on a large scale.
FICO 10 and optional 10T
Late payments, also called derogatory marks, will affect your score more negatively with the new FICO 10 model. This will make it more important than ever to make your debt payments on time.
Consumers could be penalized for having installment loans, also called personal loans or consolidation loans. Although consolidating credit cards into a personal loan may be a smart financial decision- lowering rates and payments and paying off revolving balances (which can increase your score)- adding balances to those revolving credit cards after the consolidation loan can be a red flag for lenders. You can dig yourself in too deep if you add a big personal loan payment and then rack up the credit card debt again afterwards.
Trended data- optional, available on the FICO 10T only
Scores are typically based on your credit history over 24 months. With the newest model, the scoring system takes your trends over that time frame into consideration. Trended data includes your balances, minimum payment requirements, and the amounts you pay. The FICO 10 will differentiate between consumers who pay off their balances in full compared to those who carry-over their balances to the next month. It will also take into consideration whether you are increasing or decreasing your balances over that 24 months.