The newest FICO score is more predictive than prior scores and has significantly changed how collections are scored.
1. The latest FICO 9 score is more predictive of default than prior versions.
2. The new FICO 9 scores completely ignore paid collections but still count unpaid collections very negatively.
Now it is obvious that paid collections are still negative even if less negative than unpaid ones but the fact they were paid reduces their negativity substantially or this change would not have been made. Part of this is covered through other negatives. Bank card chargeoffs are reported for 7 years and it is only the associated paid collection that is removed from the new FICO score. OTOH, collections from things like traffic tickets, medical collections, or late library fees will no longer affect credit scores at all if paid.
@Anonymous wrote:
That's another thing I don't understand about fico.
Why do they allow lenders to use old fico versions?
I read it will take a very long time for lenders to update to the new version. If they created a new version to be a more fair representation of the borrower then what's the point if lenders don't use it.
In many ways it is similar to why so many businesses still use Windows XP. Banks don't just use a FICO score. They combine scores with other information they have including possibly using some data from consumer reports that isn't used for FICO. Examples include income (which is not directly in reports but can be inferred and is in applications) and employer history.
Banks are conservative by nature.
New FICO scores may be more predictive used alone but when combined with other data in the bank's customer base it may not be as good since those algorithms were developed with an earlier version of FICO scores.
So what banks do is test new scores against their historical consumers, adjust their algorithms, then slowly cut in a small number of apps randomly selected to see if they perform better than the older system. If so eventually they will cut in the newer scores but this can take many years before most credit decisions use the new FICO.
Mortgage apps are even slower. FICO scores are designed to be predictive only over the next 2 years. Mortgage undewriting has a much lionger view so they collect a great deal of data on each consumer then factor in FICO scores to make a lending decision. This is watched for many more years. Essentially long enough that homeowner equity will rise enough so that the loan risk is a fraction of what it was at the time the loan was originated. That's why most mortgages are originated using decade old algorithms.
OTOH, mortgage securitization makes heavy use of newer models because pricing them is dynamic and based on relatively short term performance. Also, mortgage securitization does not have access to the mortgagee's detailed financials so the most accurate scoring is more appropriate.
Exactly. Banks have to make sure any new score fits in with their own experience. Improved scoring algorithms mean the possibility of lending to more people at the same risk level but they have to validate scoring against their own customers which don't typically match the wide universe of people scored by a generic algorithm. No bank will risk a change that could result in unforseen losses as those executives that made the change will be out on the street. So it takes time.