Changes to the FICO credit score calculations have the potential to increase the scores of some consumers, including private student loan borrowers.
Lenders use FICO credit scores as a way to predict whether a person will repay his or her bills on time over a two-year window. Scores range from 300 to 800, with numbers on the higher end of the spectrum indicating less risk to the lender.
According to an August 7 press release from Fair Isaac Corp., the company’s new FICO Score 9 is designed to be “more predictive” of the likelihood of debt repayment than previous iterations of the score. The new score will no longer include information about bills that have been paid off or settled with a collection agency, and will place less emphasis on unpaid medical bills that are with a collection agency.
Consumers with limited credit history – or “thin files” – will also be given different consideration as the new score was designed to reflect “a consumer’s repayment behavior in degrees of risk.”
“For example, instead of classifying a consumer as someone who paid or didn’t pay her bills in absolute terms, the various degrees of the consumer’s payment history have been quantified,” according to the press release. “The end result is a score with an improved ability to assess the risk of thin files.”
The change in calculation has the potential to improve the credit scores of students who borrow private loans to pay for college, although it is not likely to have a dramatic impact on the private student loan industry.
Nessa Feddis, senior vice president and deputy chief counsel for Consumer Protection and Payments at the American Bankers Association, said the impact of the change to private student loan borrower is likely to be “minimal.” While important, credit scores, she noted, are only one piece of the puzzle lenders look at when deciding whether to issue a loan, particularly for younger students who have thin files.
“We are not anticipating a significant change based on the new FICO calculations,” Rick Castellano, vice president of Corporate Communications for Sallie Mae, said in an email. “In general, our custom underwriting model assesses the ability, stability and willingness to repay. While a potential customer must meet a minimum FICO score, our custom model is the primary vehicle for underwriting credit.”
Castellano noted that Sallie Mae offers its student borrowers free access to their FICO scores.
Fair Isaac estimates a median 25-point increase in FICO scores for consumers whose only major negative references are medical bills in collection. FICO Score 9 will be available starting the fall to lenders through the U.S. credit reporting agencies.
Publication Date: 8/20/2014