Revised FICO Credit Model

2020-02-27 Revised FICO Credit Model

The Fair Isaac Corporation rates personal creditworthiness of basically everyone using its FICO Score model. Our individual FICO Score factors into the pricing we receive on all of our borrowing, and most of the financial services we purchase. It is a critical driver in mortgage loan availability and interest rates for home buyers.

In late January, Fair Isaac announced an update to their FICO Score model. The new credit scoring methodology will be available to lenders beginning in the summer of 2020.

The press release emphasized that the basics of the FICO score will not change. It will still utilize the same scoring range, and will still have the same fundamental structure. Presumably the weighting of credit risk factors will be different in the new model, but they didn’t discuss the secret sauce. The biggest innovation the press release touted was the use of “trended data,” which means looking to see if your credit factors are moving in a positive or negative direction over time.

At the end of the day, the FICO Score is used to help limit losses for the companies extending credit to consumers. Fair Isaac believes that the new methodology will reduce defaults for newly originated mortgage loans by 17% compared to the current model.

Commentary about the change suggests that the new version of the model will look very unfavorably on personal loans. The personal loan market has grown rapidly in recent years, with those funds often used to pay off higher interest rate credit card debt. While that may be a good decision to reduce interest costs, it is only a positive in the long term if you also stop incurring new credit card debt.

The consensus I’m seeing is that Fair Isaac will be more aggressively evaluating financial behaviors. People with high debt levels and high credit utilization will see their FICO Score fall more quickly than before as their balance sheet deteriorates. At the same time, people with low debt levels and low credit utilization will see their FICO Score increase.

If you are planning to purchase, or refinance, a home you should talk with a lender to see whether it would be better to secure the loan before or after the change to the FICO Score model.