Auto Industry Moving to FICO 8 Credit Score
In a recent article I talked about by how Citi Cards and some 3,500 lenders had made the switch to the FICO 8 score, FICO’s most up to date credit bureau based risk score. Add to that most of the auto industry, which made the switch to FICO 8’s Auto Score version in April and May 2011. The auto industry version of the FICO score is built to predict delinquencies specifically for auto related extensions of credit.
FICO periodically re-engineers their scoring systems this is the eighth version, hence the name FICO 8. The newer versions of their credit scoring models perform better than the previous versions, or a newer version would not be released. Better performance means the scoring system does a better job of identifying future “bads”, consumers who will go 90 days delinquent or worse on a credit obligation in the subsequent 24 months after the score is calculated.
A score generated by the FICO 8 model will reflect a more severe penalty if you are highly utilized on your credit cards, which indicates FICO’s research has concluded that consumers who are more highly utilized are more risky to lenders. You’ll also be given some leniency if you’re late one time, but will lose more points if have many late payments. And finally, FICO 8 ignores collections with an original balance under $100. The score ranges are still 300 to 850.
Switching From An Older Version of FICO
Any company or industry contemplating a switch to a newer version of a credit score usually conducts extensive testing to determine how the new version performs compared to the previous version. The newer version has to outperform the older version to make it worth the expense to adopt a newer version. There is also considerable attention paid to how a lender’s score distribution will change with a newer version. For example, if a lender has a target of approving 70% of their applicants then a change in their score cutoffs might be needed.
For an entire industry to change to a newer credit score version clearly involved FICO convincing the key players and industry influencers to make the change. Switching of the auto industry takes planning because the auto lending process involves dealers, captive finance companies (owned by the auto manufacturers), auto finance companies, banks and other lending partners. Each company needs to be on the same version of the score at the same time; otherwise, they won’t be yielding the same decisions due to different scores. For example, if an auto dealer qualifies a loan based on a score their lending source really needs to pulls the same score (or better). To give you an example of the numbers involved in switching, a majority of the dealers use credit scores which includes 48,000 independent or franchised dealers.
The other key industry that uses FICO scores is the mortgage industry. This industry has many different companies involved in the mortgage process and they have to switch at the same time also. Stay tuned for the next switch to FICO 8.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.