Last week, the current Federal Housing Finance Agency (FHFA) director announced that lenders will be allowed to use a second credit scoring methodology to assess creditworthiness for government-sponsored Fannie Mae and Freddie Mac mortgages. This announcement was good news for scoring runner-up VantageScore but caused the stock price of Fair Isaac Corporation (FICO), the dominant credit scoring company, to dip shortly after.
FICO Scores, introduced in 1989, have been required to be used by Fannie Mae and Freddie Mac since the mid-1990s and are the most widely used type of credit score. But that doesn’t mean they are the only option. Here’s what to know about the changes.
A quick history check
While the recent announcement implied that this was a new decision “consistent with President Trump’s landslide mandate to lower costs,” the process to expand and modernize credit scoring models has been in the works since 2014, and in 2022, the FHFA announced that “after a multiyear transition period, lenders will be required to deliver loans with both scores when available.”
Both scores in this case refer to VantageScore 4.0 and FICO 10 T. Both of these are the latest versions of each company’s credit scoring models. However, they aren’t the only models available for use, and lenders aren’t required to choose the latest version when assessing creditworthiness. Think of it like the latest iPhone. Just because the iPhone 16 is available, it doesn’t mean that the iPhone 12, 13, or 14 doesn’t have the same basic functions and can work just as well. Rather, each new version has updated features to meet the needs of the moment. As FICO notes, “we use credit much more frequently than we used to,” and if the models weren’t updated, “seemingly normal credit usage today would be considered a higher risk than in years past.”
Although lenders are unlikely to abruptly change the scoring models they use right away – after all, not everyone immediately updates their iPhone when the newest one is released – it does open up the door for more options and alternative ways of scoring an individual’s creditworthiness.
The latest changes in credit scoring
The Consumer Financial Credit Bureau estimated that 45 million people have either no credit history or too small of one to produce a credit score. Some recent changes in credit scoring models have been implemented to address those consumers who may have never had a mortgage, auto loan, or credit card but are responsible with their financial obligations in other ways, such as paying rent on time.
It is still relatively uncommon for landlords to report rent payments to credit agencies, but that is slowly changing as consumers push to have their payments included. Additionally, a surge in third-party services now offers consumers the option to report their rent payments directly to credit bureaus. Even though not all versions of credit scores have the capacity to consider rent payments (only FICO 9, FICO 10, and all VantageScore versions do), the inclusion of on-time payments can improve an individual’s score.
The most recent inclusion in credit scoring is Buy Now Pay Later (BNPL) lending, a type of small loan that allows consumers to split payments on everyday purchases over a short time period. Last month, FICO announced that two new versions of its scoring algorithm are expected to be available to lenders this fall: FICO 10 BNPL and FICO 10 T BNPL. These new models take into account this type of credit that has become increasingly common for consumers – a 2023 survey by the Federal Reserve Board found that at least 14% of adults had used BNPL in the past year. The inclusion of BNPL can also help reduce “phantom debt” – debt that isn’t reported to the credit agencies – that allows lenders to get a clearer picture of an individual’s financial situation.
