FICO 9 got it wrong (in my opinion)
There has been a lot of talk about FICO 9 the latest version of the credit Score by the FICO Corporation. FICO 9 has made some improvements over FICO 8 that was a big improvement on the forbearer FICO 04. Fannie and Freddie require that every mortgage sold to them (which means ninety-nine percent mortgages) are required to use The credit score version called FICO 04
Each individual credit repository calls their version of FICO 04 something different.
• Equifax Beacon 5.0
• Experian FICO V2
• Trans Union FICO Classic 4
The change that FICO made to FICO 8 was good although, with FICO 9 I think FICO went the wrong direction. Here is why, if you have a paid collection on your credit report it will no longer (in the FICO 9 version) count toward your credit score.
The problem with that is that FICO Credit Score predicts the likelihood that you’ll pay in the future based on your past history. If FICO remove a paid collection completely out of the scoring model there will be an over appraisal of that particular borrower. FICO is skewing what would otherwise be a negative score, up higher than it should be. The person with no collections is a different risk than somebody who had collections and paid them off recently.
I think FICO 9 is a mistake and this change is another reason why Fannie and Freddie will never use it. Basically we’re going to be stuck on FICO 04 four the for see able future.
The real disappoint is the positive things FICO did with medical collections on FICO9. FICO actually made a substantial improvement on how medical collections are handled. With FICO 9 medical collections are no longer treated the same as a regular collection. People get medical collections all the time and probably should be the responsibility of the insurance company. Most of the time the paperwork not done right and those people are overly penalized from a FICO score perspective.
With FICO 9 somebody with just a few medical collection accounts on the credit report will see and improvement of up to 25 Points. I think this was a good move from a fairness perspective.
Unfortunately, like I said before Fannie and Freddie will not accept FICO 9 because of how misleading the paid collections are now being scored, like I wrote about above. Fannie and Freddie would have to rewrite all other programming, all their algorithms that they have used for the last ten years.
FICO 9 may have some other uses, but for everything else revolving around mortgages, no one is going to use FICO 9. What really bothers me is the way the news media spinning this; it is going to create a lot of confusion. People are now going to start paying off the collections thinking that they’re doing a good thing (they are in the long-term) but in the short term this type of credit behavior can major negative impact with FICO 04 model. I really am disappointed in the fact that all these major news organizations are not investigating what they are telling the public.
Please share this video with as many people as you know that might be in the market for a mortgage.
This is Dave Sullivan for the credit guy TV… FICO 9 a disappointment and bit of a head fake… so you with a little bit me; we’re going to change the credit industry. thank you!
If you’re looking for other ways to improve your credit score please go to GetLoanReady.com you can get free videos and worksheets to increase your credit score from a more holistic perspective. Never Pay Collections
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