Equifax (EFX - Get Report), one of the three major credit-reporting agencies, today unveiled its BEACON Mortgage Score -- a scoring system based on a scoring model developed by FICO (FIC) (previously Fair Isaac Corporation). Meanwhile, FICO's new scoring model, FICO 08, was recently adopted by TransUnion under the name FICO Risk Score, Classic 08. Both new scores promise better predictive ability to identify lending risks, especially in the the mortgage arena.
Lending risks are trending higher as credit scores appear to be dropping. The median score over the past few years has stayed around 720, but Barry Paperno, manager of consumer credit operations with FICO, says the median has been declining over the past year.
"We are seeing a higher amount of risk, as are lenders," says Paperno. "We look at an odds ratio of the number of good accounts to bad accounts at a particular range of scores, and that ratio is getting worse."
Updating credit scoring formulas is done every few years, and is necessary in order to stay current with evolving risks and shifting trends in the industry. At times models need to account for new credit products, such as home equity lines of credit. In general, however, updates are required to better predict changing risk. To adapt to the latest change in consumer credit risk, FICO 08 is more refined in how late payments and credit card balances impact the overall score.In the past, a single late payment was as damaging as missing a number of payments across different accounts. Under FICO 08, that single missed payment will still hit your credit score, but not as badly. And the impact will be shorter lived -- the FICO 08 score recovers faster than the older scoring models from an isolated missed payment. Meanwhile, consumers with multiple late payments will be hit with a larger drop in their credit score.