By next spring, two of three credit reporting bureaus will use a new model. Fair Isaac, the developer of FICO scores, has made the biggest change to its mathematical credit score model since it was introduced in 1989. Scores will still be on a 350- to 800-point scale. But the company estimates that 40% to 50% of borrowers scores could go up or down by more than 20 points because of how the new model fine-tunes the variables it uses to evaluate consumers credit use behavior.
For creditors, the new FICO score promises to reduce the risk of defaults, improving the predictability of defaults by 5% to 15%. Delinquencies are at their highest rate since 1992, when the economy was also in a recession. The revised scoring method has a few more gray areas fleshed out so it gives us confidence in credit scoring models, says Ginny Ferguson, a member of the board of the National Association of Mortgage Brokers.
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Source: Kiplinger
