With the new FICO 10 around the corner, Merrill Chandler goes ahead and gives a refresher in this episode. Getting into the history of FICO to enumerate the changes implemented over the years, he proceeds to share his bootcamp that will deep dive into FICO 10 and give you all the tools you’ll be needing. He also talks about the changes that are worth taking note of when you’re looking to increase your fundability and discusses in detail how FICO will be tracking your account management, its impact on your fundability, and how to use it to your advantage. Learn how FICO can be predictable and what it means for you.
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The New FICO — FICO 10
When the People Who Said You Were “Crazy” Find Out You Were Right
I am excited because finally, it’s here. We’re going to be talking about FICO 10, the newest version of the FICO funding approval software and all the things that come with it. We’re going to do a deep dive into this awesome software that has some great news for us. For those of you who’ve been bingeing all my episodes, you’re going to see that the things that I’ve been telling you are ahead of their time.
Let’s take a look at this. This is fun. I’m telling you, FICO 10 is killing it. In this episode, we’re going to be talking about how FICO 10 impacts you. As I did my study of all of this, I checked in with my FICO liaison, I was a little ahead of my time. We’re going to talk about the things that I’ve been preparing for my students and clients in the Bootcamp. Even what I wrote in the book, we’re all forecasted to come out in FICO 10. All the information that I got from FICO, they’re talking about the newest version of the software and tightening up all these things. For some of you, I may be speaking credit geeky, but I’m excited to share this with you.Make sure that you can make proper and deliberate choices, and you’ll need facts to do so. Click To Tweet
The FICO Evolution
The first thing I want to do is I’m going to teach you a little bit about the history of FICO and what all the things are that FICO has been releasing over time. This is the FICO Score evolution. As we evaluate this process, the original score, what was known as FICO 542 had different names years ago. The FICO Score began being used in the credit evaluation for lenders back in 1989. They had been evaluating the borrower behaviors since the ‘50s, but it got fine-tuned in the late ‘80s with a formal tested score. In 1991, when 542 was announced, each one of the credit bureaus had its version of the FICO software. Version five for Equifax, four for TransUnion, and two was the version that Experian used. We call it 542 because all three bureaus were using their customized FICO algorithm for their data. In 1993, FICO came out with the industry-specific scores. Sometimes I refer to them as vertical scores because they are vertical markets, but there are scores for auto loans, credit cards, bank card scores, and for a mortgage and small business lending.
Small business lending we’ve come to know as small business scoring services. These four vertical markets, small business, mortgage, auto loans, and bank cards all started in the early ‘90s, in 1993. In 1995, Fannie Mae and Freddie Mac started using the FICO scores to evaluate the residential mortgages. Each one of these industry-specific scores has an entire division at FICO where they’re building based on the specific data for those scores. Be sure to read my book and come to my Bootcamp. It’s GetFundableBook.com and GetFundableBootcamp.com so you can find out. We go through all of these in a huge, massive deep dive on how to explore and how to use these different scores for your fundability. In 2001, FICO launched myFICO.com and that’s where we recommend, if you want the truth about your credit score and where you can get a copy of your mortgage scores without going to a mortgage broker, copy of your auto dealer scores without going to an auto dealer, or copy of your bank card scores.
All your credit scores are evaluated based on these verticals there at myFICO.com and get those reports. I don’t recommend anything else because as I always tell you, only the truth is actionable. We want to make sure that we can make proper and deliberate choices and we need the facts to do so. In 2001, myFICO came out and empowered us. It was able to give borrowers the tools they need to see how they’re doing. In 2004, they started offering FICO scores in other countries. In 2007, they put the 100 billion FICO score was sold. Those are milestones.
In 2009, FICO Score 8 was introduced. It is what’s commonly used these days. If you read my book and the Bootcamp, we talk about FICO Score 8. The unweighted score is the one that’s used more than any other score used by lenders. Your account valuations when they do a soft poll, all those types of things are FICO Score 8. It was established in 2009 and it is a big deal. Still, it’s the highest installed base. FICO started using what’s called the economic impact index so they could see more and more and that’s some of the data that’s being used for what I’ve been speaking about, the FSSI score. They’re not the same. The economic impact index is not the FICO Score Stress Indicator, FSSI. That’s a new release or the thing that they’re still working on and has an integral relationship with FICO 10.
In 2012, they announced scores for the Spanish-speaking language market. In 2013, there’s what’s called open access. It is this free access when you go to your credit card issuer or some of your insurance companies. They will say, “Get a copy of your FICO Score.” That FICO Score is what’s called the open access. You’ll read about it, learn about it in different areas, but the 30-second review open access is if they use FICO Score 8 to establish a credit limit increase or to review your file, it’s called an account review. If they use that, then FICO in 2013 said, “You’ve already bought this score so that you can use it to evaluate how well your credit card holder is doing. We’ll let you tell them that score.”
It’s not your auto scores, mortgage score. It’s not the score that’s being used to evaluate you for bank card and big-ticket purchases. Think of FICO Score 8, the unweighted score is a review score. In 2013, they started allowing banks and credit card issuers to give you the score that they already purchased. The book and the Bootcamp, do deep dives into this so you can not just know these cute little facts, but how it impacts your fundability and your funding approvals. Knowing the rules of this game is a home run. In 2014, FICO Score 9 was launched. It was where they removed any paid or unpaid collection. It was not counted against your score. Any medical collection, paid or unpaid, was not counted against your score. Anything under $100, $32 cell phone bill, whether it was paid or unpaid, FICO Score 9 didn’t count it. That was historical.Learn how FICO scores impact your fundability. Knowing the rules of this game is a home run. Click To Tweet
Now, we’re even more significant because in 2020, years later, they have announced that FICO 10 would be released. Let’s take a look at where that goes. There’s the history, the review of all of this.
FICO 10 Changes
What is FICO Score 10? I have the release paperwork that I received for my FICO liaison about some of the big deals. I’m going to quote the actual product sheet for FICO Score 10 to give you an outline. There’s FICO Score 10 Suite. It means you’re going to get the unweighted score as we talked about that lenders can provide you. They’re also giving you access to the auto score, the mortgage score, the bank card score, and the auxiliary business credit score. All of those are what’s called the FICO Score Suite.
There’s also FICO 10 T. It considers your trended data. I don’t know why this stuff turns me on, but it is my jam. I’m going to show you some things we nailed. It says that lenders who use FICO 10 are going to have a significant reduction in a default. Here’s exactly what it says, “A lender could reduce the number of defaults in their portfolio by as much as 10% among bank cards.” That means that the predictive power of FICO 10, lenders will lose 10% less to default from this process. Using this, the lenders will save 17% more from losses due to defaulting mortgages.
It even says that it’s 9% auto loans, 10% of bank cards, and 17% fewer defaults on mortgages. These numbers are incredible. This is in one version improvement from FICO. Let’s go over some of the big pieces of what this means. FICO 10 talks about trended data for the first time. I have built the entire fundability optimization on trended data. We call it the 24-month lookback period. FICO doesn’t call it a lookback period, but if you read anything about FICO 10, it uses trended data sometimes called time-series data. That is how you’ve managed your accounts over the previous 24 months. How was that? We’ve been coaching our people, coaching you, even in this show, the book and the Bootcamp on exactly how to manage your previous 24 months so that you can be more fundable. You can take down more funding approvals.
They’re distinguishing between revolvers and transactors. They called borrowers who charge up to $10,000 on your credit card and then pay it to zero on the due date. Those are called transactors. Revolvers are individuals who carry a balance and make a smaller payment or a minimum payment on that balance. The score, in everything that I’ve ever learned before, they didn’t score those things. It was always based on the balance. They are differentiating those who pay it all the way down but you’ve got to understand. We’ve talked about this, those of you who are learning from my Bootcamp and clients, they’re still not revealing to the world about the reporting date and how to carry the perfect balances at the reporting date.
Consumers who pay their credit cards in full are considered lower risk than those who carry a balance, but they are tracking over to the 24-month lookback period. Over this period, they’re watching the reduction, maintaining, or increasing of your balances. As I predicted and I’ve been teaching my clients, the score is watching all of the movement over the last 24 months. They only talk about 24 months. I’m telling you, from the research that we’ve done, the subtle answers we’ve been given from our people at FICO, what they’ve told us in private. They have not said publicly, but these periods in the 24 months are 3, 6, 12 and 24 months. They have a significant impact on your score.
How you reduce, maintain, or increase your balances is being measured. We’ve been coaching on this, but I’m telling you, they’re coming out in full force and telling everybody what they’re doing. This is awesome for our borrower education efforts. Next is delinquencies will hurt your score more under FICO 10. Delinquency is the 30, 60, and 90-day late. If you go 30 days late, it’s going to hit you harder than it did in FICO 9, FICO 8, or FICO 542. Any delinquency has a more immediate impact against your score and your fundability and it’s going to last. Those last a minimum after 24 months, you get back some of the credit score points from delinquency. After 48 months, another 24 months lookback period, you get more of those points.
Credit card debt will have a bigger impact on FICO 10 as well. We’ve always talked about that your personal credit profile, your borrower profile is the goose that lays the golden eggs. That means the better you take care of your personal profile, it will lay the golden eggs of funding opportunities up both mortgages and cars on your personal side. Over on the business side, you have a higher capability of getting funding approvals. They’re tracking to a more significant degree the credit card debt, what the pace is, what it is that you’re carrying. Credit card, personal loans may lower your score.
Remember, we call it debt shifting. I’ve been loud and proud about this. They’re not the only ones that know this, but we are one of the few outsides of the hallowed halls of FICO that know the impact that this has. Several times if people got credit card debt, they’ll go and get a personal loan. The personal loan could be from a credit union. It could be from a FinTech, the Financial Technology companies, etc. Do you use those loans to pay down your revolving debt? Usually, those personal loans have a lower interest than 18%, 22%, or 26% that a credit card would. The problem is that they’re tracking. If you get a personal loan and you pay down those credit cards and then you charge on those credit cards and carry a balance, your score is going to take a significant hit.
There are strategies on how to use your revolving accounts, your credit cards after you pay them down, but you’ve got to know how the rules are. They’re only giving us the little tiny tips of the iceberg. They’re not talking about all that stuff that sank the Titanic because it wasn’t visible when it got hit. That personal loans used to pay down credit and then if you don’t use your credit cards after that the right way, it’s going to hit your score significantly. Every movement in your profile is going to have a greater impact. In the Bootcamp, we talk about what we call the fundability pyramid. This states that if you do an activity, the impact of that activity is different based on where you are on the credit profile.Any delinquency has an immediate impact against your score and your fundability, and it's going to last. Click To Tweet
Let’s say you get an inquiry. If your scores are in the 600, that inquiry may take fifteen points. If you’re in the 700 that may only count ten points against you. If you’re in the 800, they may only count five points against you. Wherever you are on the fundability pyramid is how much impact. The positive happens the same way. If you do a positive borrower behavior, it has less impact. The higher up you go, the more impact, the lower you are on the fundability pyramid. FICO 10 is saying that those movements are going to be even bigger. Let’s say you have a $10,000 credit card and you pay down $5,000. You paid half off it, 50% utilization, you charge all the way up and you paid half of it back.
If you’re in the 600, it’s going to have even more powerful of a positive impact. If you’re in the 700 and 800, it will have a more positive impact compared to previous FICO 9, FICO 8, and FICO 542 but negative behaviors, which include inquiries, late pays and high balances are going to strike you down. It says, “The bad gets worse.” Any activity that you’re doing, and any borrower behavior you do, if it’s a positive one, you get a greater impact. If you do a negative borrower behavior, you got a negative borrower more significant negative impact against your profile. FICO 10 is phenomenal and apparently, lenders can opt for FICO 10 or FICO 10 T, which means all the trending data and this trending data are the bombs.
As a recap, FICO 10 is going to be available to lenders. It’s an entire suite of scores. If you want to know more about this, get my book, The New F* Word at GetFundableBook.com. If you want to do a deep dive in two days of this level of understanding, and remember, you’re not only learning stuff, you’re learning what you do matters across 40 plus borrower behaviors. Come and find out how to use those borrower behaviors to your advantage. As soon as they publish it, we’ll have a complete section on FICO 10. My book talks about FICO 10 and how it works. I’m excited about this. FICO gets tighter. The more predictive they get, the more power we have over our funding approvals.
If you know what they’re measuring and if you know what they’re looking for in their funding guidelines, all we have to do is behave to fit the funding guidelines and you’re in charge of your approvals. I love that it’s getting more predictive. I love that we know exactly what those borrower behaviors are and how to hit your funding. In this COVID-19 craziness that we’re all going through, the attending craziness of the markets, and some sort of recession that everybody’s talking about, this is the time to know the rules of the funding game so that you can know the strategies to survive as a business and as a family. You’re funding survival.
We can then show you how to protect your business and do what we call the slingshot effect and create so that it thrives and you can launch into the next phase after this. I don’t think it’s going to go that long, but what do I know? I only know how to predict what FICO is going to measure in their next software release. Thank you for joining me. You guys are amazing. Keep bingeing everything we’ve got, every single episode. Binge every single Facebook Live. Join us, be a part of this community so that you know exactly what time it is and how FICO is going to truly transform your life and show you how to get funded. It’s been a pleasure. Have a wonderful rest of your day.
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