FICO 10 Is Here, But Experts Believe It Could Take Years Before It Impacts Consumers

• The new FICO 10 credit scoring system would become available to big credit scoring firms and lenders by end of 2020.
• Under the new system, greater emphasis has been placed on borrowing trends, including the amount of outstanding credit card balances and number of payments made on time.
• Experts say the new system could take years to adopt, as the industry has historically shown a slow adoption rate with new credit scoring systems.

The new credit scoring framework called FICO 10 was recently announced, however, lenders are unlikely to quickly adopt the new scoring system. In fact, historical trends have shown that there is a considerable lag in the system when it comes to the adoption of new scoring models. Hence, according to experts, it is pointless for customers to worry about the new system and how it changes their credit score, at least at this point in time.

The FICO 10 is expected to become available by the end of 2020, and the Big 3 firms responsible for reporting credit, including Equifax, Experian, and also TransUnion, will gain access to it at that time.

There is a lot of interest in the new scoring system, at least on the lender’s end. Many lenders are curious about the improvements that have been made in the system, and how they could impact their business. Experts believe lenders would be testing out the new scores, as soon as they become available.

The current FICO system holds credit scores for over 150 million people in the US. Experts believe that the majority of these scores, or around 110 million, would not experience any drastic changes. In fact, out of these, 40 million might even witness their scores increase by over 20 points. However, 40 million consumers are likely to have their scores reduced by around 20 points as well.

The new FICO 10 system would place greater weightage to late repayments, and also base the credit score upon the historical credit card and payment habits of consumers. Hence, if a customer has a trend of maintaining a high balance on their credit card at the end of every month, this could result in a lower credit score even if minimum payments are being made on time.

However, experts believe it will take a few comfortable years for these score changes to have any real impact on consumers.

The last update to the FICO system had come around five years earlier, which had come five years after the FICO 8 was launched. However, these earlier models are still in the process of being adopted by lenders. This lag in adoption of the new systems is largely due to the usage of the so-called ‘classic’ FICO score, which has been preferred by lenders for more than 20 years now.

According to experts, lenders use the classic score because both the largest buyers in the secondary mortgage industry, Fannie Mae as well as Freddie Mac, use it. Lenders use the same system to ensure resale to other investors.

However, this convention could change soon. The Federal Housing Finance Agency allowed both Mae and Mac to use alternative models for credit scoring, which means both these agencies could adopt the FICO 10 or any other model.

But, even if such an adoption takes place, experts believe the industry would take approximately 18-24 months more to adjust accordingly.

Also, lenders use many other financial criteria to evaluate a loan application, with many placing little emphasis on the credit score of a borrower. Good borrowing practices and healthy financial behavior should be encouraged at all times, regardless of the credit scoring system in place.