March 3, 2016

How Credit Scoring Will Change in the Coming Years

Simple. Thrifty. Living.

There’s no doubt that consumers and government officials are more than ready to see changes in how credit scores are determined. In fact, a settlement in 2015 between New York state and several different credit reporting agencies has driven some changes in credit scoring for the next few years. However, developments were already in the picture before then, as Fair Isaac worked to bring FICO scores more in line with VantageScore.

In 1958, Fair Isaac developed the first credit score model, and in 1989, established FICO scores for general-purpose use. Since then, FICO reports are the most common document used when lenders consider your credit scores. However, the top credit reporting bureaus, Experian, TransUnion and Equifax, must pay Fair Isaac a license fee to use the FICO algorithm. So, in 2006, the three organizations united to develop their own algorithm, VantageScore. While VantageScore has caught on nicely, accounting for almost 1 billion generated credit scores in 2014, FICO remains the undisputed industry leader. That said, the next few years should see continued expansion for VantageScore — the number of banks using it grew by 24 percent in 2014 alone.

The emergence of VantageScore, which assigns a minimal amount of weight to your available credit and recent credit behavior, caused Fair Isaac to re-evaluate its FICO algorithm. In 2014, FICO scores became more in line with VantageScore in a move called FICO 9. FICO 9 considers situations such as payments made to utility companies, some landlords and cable TV companies. Among the people it benefits are renters who pay on time and who have little credit history. In general, it gives a boost to folks who tend not to use typical credit products.

About 90 percent of all credit scores are FICO, and while VantageScore and alternatives are growing, that 90 percent figure looks to stay stable.

Here’s a look at a FICO credit score breakdown:

  • Payment history accounts for 35 percent of your score
  • Amount owed is 30 percent
  • The length of your credit history is 15 percent
  • New credit is 10 percent
  • The type of credit you use is 10 percent

VantageScore does not give out exact percentages, but it cites payment history as its most influential factor. Also very important are your age and credit type, and how much credit you use. Of some importance is your total debt, while your available credit and recent behavior are not too important.

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