FICO's New Credit Score 9: How They Could Affect College Students
Recently, FICO announced that it would make a fairly significant change to the way it calculates credit scores. Specifically, the company would no longer give as much weight to debts incurred because of medical costs. Since this type of debt accounts for approximately 50% of all debt on credit reports, this is a fairly significant change.
In addition, the new FICO score calculations will ignore any debts that have been paid. In its previous iterations, the company scored both paid and unpaid amounts on an equal level as long as they were over $100.
So how will this affect college students and graduates? Here are a few thoughts.
If you have significant medical debt, you’ll see your scores rise
If you have a clean credit history other than your medical debt, your FICO score could go up by as many as 25 points. If your medical debts went to a collection agency before they were paid or settled, you’ll see an even larger increase in scores.
If your debt went to collections and was paid off or settled, your scores could rise
If you had outstanding debt that went to a collections agency before it was paid off or settled, that used to count against you. Now, it won’t—including other types of debt, such as student loans. This is an attempt to improve the fairness of the scoring model, which will now no longer count against you debt that you have paid or settled.
If you don’t have major medical debt, your scores could fall
The new formula could also make scores fall for those who have significant unpaid debt that are not medical in nature. This includes people with significant student loans. If you have student loans that are still being paid off or are in any form of distress, your scores could suffer under this new model.
Not all banks will use this new model
Banks aren’t required to use current FICO scores to determine whether they’ll give someone a loan, or the interest rate they’ll ask for. FICO releases new formulas on a semi-regular basis. The current iteration of the score is FICO 9; when FICO 8 was released in 2009, it took until 2010 for approximately 2,700 lenders to get on board—and Citi, one of the country’s biggest credit card issuers, didn’t adopt the new formula until 2011. Some lenders depend on FICO formulas going back to 2 or 3.
It may or may not help you get a new student loan
Because some banks use older FICO scores to evaluate whether to lend to you and under what terms, your new FICO score may not change the way banks treat you—depending on how quickly the bank in question accepts the new FICO scores, or whether it does at all. Fannie Mae and Freddie Mac also use older FICO formulas to evaluate potential borrowers.
The new FICO credit formula could make your credit score rise—particularly if you have significant medical debt, or debt that went to collections and was paid or settled. If you have significant student loan debt from a traditional or accredited online school, it probably won’t rise as much—but even so, it’s possible you’ll qualify for better interest rates on home loans, car loans, and other types of loans, as well as finding it easier to do basic things like rent an apartment or land a job. Your credit score affects all areas of your life. The new FICO credit formula has the potential to affect millions of people throughout the country—hopefully, positively rather than negatively.
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