Why Won't Lenders Use FICO 8?

Fair Isaac Corp. has been delivering credit scores to lenders since 1989. Over the years, the company has revised and improved its industry-standard scoring formula a number of times to ensure that the formula does the best job possible of predicting consumer credit risk.

Several years ago, FICO went to work on a new credit scoring formula. It planned to release the new formula in 2008 (thus FICO 8), but release was delayed by a lawsuit until 2009. Still, almost three years after the updated formula was made available to major lenders, they're not using it. Why? Two primary reasons: Major lenders move slowly at the best of times; and these days most of them have more urgent matters to address.

5 Major Changes to FICO 8

Obviously, the way people use credit evolves over time, so any scoring formula that predicts credit risk must evolve as well. The FICO 8 formula includes five main changes, the company states on its website.

1. High credit card usage: FICO 8 is more sensitive to highly used cards. So if your credit report shows a balance that's close to the card limit, your score will likely lose more points than it would have before. (To avoid this, keep your monthly card balance low.)
2. Isolated late payments: If a lender reports to the credit bureau that you were at least 30 days late with a payment, your FICO 8 score will likely drop. But if a late payment is an isolated one and your other accounts are in good shape, FICO 8 is more lenient than earlier FICO formulas. That said, if your credit report shows a lot of late payments, FICO 8 is less forgiving than previous formulas.
3. Authorized user of credit card: Every FICO formula has included authorized user credit card accounts when calculating an individual's score. FICO 8 does also. This means people can benefit from shared management of a credit card account. It also helps lenders by rendering scores that are based on a full picture of a consumer's credit history. To protect lenders and honest consumers, FICO 8 substantially cuts any benefit of "tradeline renting." This is a credit-repair scheme that works by adding a user to a stranger's account to boost their credit score.
4. Small-balance delinquencies: FICO 8 ignores small-dollar "nuisance" delinquencies with an original balance of under $100. Many of these are medical charges that people are disputing or they never knew about.
5. Dividing consumers into more categories: FICO 8 also aims to deliver a more accurate prediction of risk by dividing consumers into more categories. For example, if Mr. Smith doesn't have much of a credit history, and a scoring formula compares him to a population of consumers with robust credit histories, Mr. Smith will get a low credit score, even though he may be a good credit risk. Or Ms. Jones may have a few late bill payments in her history. Categorizing her with someone who defaulted on his mansion isn't fair to Ms. Jones. So FICO 8 divides people with similar credit records into groups and compares them against each other.

If You Build It, They Won't Come

FICO built a formula that renders a more accurate and fair credit score for consumers, with the potential to help millions of people who are getting dinged by little "nuisance" delinquencies. Yet most banks and credit card issuers aren't using it. And it's totally MIA in the mortgage industry. Why?

It's hard to say for sure. Standard operating procedure in the credit industry is silence. FICO won't comment. Neither will credit bureaus. Ditto banks.

The best guess of industry observers is that big credit issuers move slowly. A large percentage of their business is based on the old FICO score, and it will take time for them to retool according to the new score. In addition to which, a lot of credit issuers these days have much more pressing matters on their plate. Because the old FICO works OK, the update is on the back burner. The back back burner.