FICO® 9 Credit Scoring Formula Can Improve Scores

The two biggest providers of credit scores are FICO® and VantageScore. But most lenders use FICO® as the go-to credit scoring model.

In fact, 90% of top lenders use FICO® Scores when making lending decisions according to myFICO.com.

FICO® Score 9 is the latest version of the popular credit scoring model, but it’s not being used as widely as its predecessor, the FICO® 8.

That’s unfortunate because FICO® 9 has the potential to increase credit scores. You credit scores are derived from the data in your credit reports. While it’s unknown exactly what formulas are used to calculate a score, there are 5 major factors in every score.

• Payment history (35%)

• Amounts owed (30%)

• Length of credit history (15%)

• Credit mix (10%)

• New credit (10%)

Credit scores reflect the risk in lending you money, and the FICO® 9 scoring formula is a better predictor of that risk.

How FICO® Score 9 is different

1. Medical Debt. The first major difference in FICO® 9 vs. FICO® 8 along with previous versions is medical debt. Approximately 43 million Americans have credit reports that contain medical debt according to the Consumer Financial Protection Bureau. With FICO® 9, medical debt is less detrimental to your credit score than credit card and other types of debt.

2. Paid Collection Accounts. With FICO® 9, paid collection accounts are no longer calculated in credit scores. That’s a huge improvement because previous versions scored paid and unpaid collections the same (both negative).

3. Rent Payments Added to Credit Reports. FICO® 9 will consider rent payments as part of your credit history and score. The problem is rental payments are not typically reported to the credit bureaus and thus not part of your score calculation. Landlords aren’t required to report their tenants’ payment history to the credit bureaus.

However, there are 3rd party rental reporting companies that can report your payments to the credit bureaus for a fee. It’s worth considering since most people will pay their rent on-time before any other credit obligation.

When will lenders start using FICO® 9

Lenders get to decide on which FICO® scoring version they use in their lending decisions. It may take lenders several years to begin using FICO® ’s latest scoring formula. It’s understandable because upgrading from one FICO® scoring version to another means system-wide company upgrades which can be costly.

While FICO® 8 remains the most popular version of the FICO® scoring formula used by lenders, FICO® 9 is showing promise. Hundreds of lenders, and eight of the nation’s top 10 lenders have either evaluated it, are in the process of evaluating it or plan to do so, according to FICO® ’s principal scientist, Tommy Lee.

Get the highest score no matter the FICO® version

You can get a good credit score no matter which scoring model is used by doing the following:

Pay bills on time. With payment history being 35% of your credit score, there’s no getting around the powerful impact on-time payments have on your score. Late payments can take up to 100 points off a credit score, and the later they are, the worse the damage.

Pay credit balances down. The amount owed on revolving credit, like credit cards or lines of credit should be kept as low as possible. That means never maxing out you’re your credit cards. Revolving credit is when a lender extends credit to you that remains the same amount month over month. Amount owed also referred to as credit utilization makes up 30% of your credit score.

Clear up errors and mistakes. Negative credit items can remain as part of your credit history up to 7 years, some items like bankruptcy can remain for 10 years. But every negative item is not necessarily correct. It’s important to review your credit reports on a continuous basis to ensure the information reporting is correct.

The Fair Credit Reporting Act gives consumers the right to dispute mistakes and errors. Disputes must be investigated by either the credit bureau, the creditor or both. The company furnishing the information to the credit bureau must investigate credit disputes within a 30-day time period If the information can’t be verified as accurate, the negative trade-line must be removed. Free credit reports, from the three major credit bureaus are available to all consumers once every 12 months.

Add positive credit to reports. The last thing you want is to have nothing but negative credit reporting and being calculated into your FICO® score. Add positive credit by opening a secured credit card or getting a loan to report. You must of course, make all monthly payments on time in order to improve your scores.

Bottom line

Three major changes were incorporated in FICO® ® Score 9 that changes how FICO® credit scores are calculated. Medical debt has less of a negative impact, paid collection debt does not factor into your score and, and rental payments — if reported by landlords — are also considered.

No matter which scoring formula is used by lenders, always make at least minimum payments on time, keep credit card balances low or paid off, and always have positive credit accounts reporting each month (outweigh negative information with positive information).