FICO Announces Changes That Could Lower Consumers’ Credit Scores

Fair Isaac Corp., which created the FICO credit score used by many lenders in credit decisions, recently announced a series of changes to its scoring model which the Wall Street Journal reports could lower overall credit scores for many Americans. This is because under the new changes, FICO plans to place more weight on personal loans, scoring consumers with increasing debt and that have fallen behind on loan payments more harshly.

High-scoring consumers who continually manage loans will likely see their scores rise higher, while those with scores below 600 who typically miss payments will see lower scores. The changes reflect the shift in lenders’ confidence in the economy, as consumer debts are at a record high.

David Shellenberger, vice president of predictive analytics and scores at FICO, told the Wall Street Journal that “there are some lenders that see there are problems on the horizon in terms of consumer performance or uncertainty [about] how long this [recovery] is going to go. We definitely are finding pockets of greater risk.”

Furthermore, in a press release issued by FICO, Jim Wehmann, executive vice president for Scores at FICO, said, “clients value the dependability and industry-leading predictive power of the FICO Score. FICO is a cornerstone for consumer lending decisions. We continuously innovate using the latest, most robust data, while maintaining consistency with previous models to ensure backward compatibility and minimize operational changes required to adopt a new score.”

Negative information, such as missed payments, usually rolls off a report after seven years, so lenders may not know how well consumers handled a financial crisis. Since credit scores could be making some consumers seem more creditworthy, lenders are trying to balance the expansion of loan volume with concerns about economic recovery.

The changes will place more importance on missed payments, rising debt levels, and personal loans. They are in place partly to offset the effects of settlements from 2015 between states and credit-reporting firms that tried to remove unnecessary information from credit reports.