If you think you “know” what affects your credit score as a small business owner — and how your score is calculated — think again. Since 2009, the Fair Isaac Company scoring model, FICO 8, has been the credit-score industry standard when determining many credit scores. But it’s soon being replaced by FICO 9. This new model was announced in 2014 and is already being tested by 12 of the largest U.S. credit-card issuers, according to the Wall Street Journal. Widespread adoption is expected to begin at the end of this year, and it will affect many small business owners seeking capital and loans.
What’s Changing
The good news for many:
Fico 9 will provide scores for perhaps 15 million people who currently can’t be scored, simply because they aren’t using credit or can’t get credit. FICO 9 will do this by looking at how you’ve paid your gas, electric, cellphone, and cable bills to determine your payment history and therefore a score. FICO 9 will also look at medical debt, something often totally out of our control, with less weight than regular debt. In addition, paid medical collections will disappear faster than before from the credit report. FICO 9 will increase the median score by 25 points of consumers whose only major negatives are medical collections.
The bad news for some:
FICO 9 will not immediately be adopted by all lenders, so if you’re one of the “scoreless”, it may be a few years before you see the full benefits. FICO 9, as stated above, will begin looking at utilities, so if you’ve been juggling bills, paying “reportable” bills first and letting “unreportable” bills wait a few weeks without worrying about the credit consequences, your behaviors will need to change. Otherwise your credit will be affected. FICO 9 will also look at how often your address changes. Frequent address changes will have a negative effect upon your score since it’s generally perceived as a sign of instability.
The Reality
Although FICO 9 and its new scoring model have been released, that doesn’t mean scores will change quickly. The reporting mechanism isn’t fully in place for utilities and telecommunications, so this data will be difficult to find for many small business borrowers. Although the LexisNexis database for this reporting is in place, the utilities and telecommunication companies will have to develop procedures and mechanisms to actually submit reports.
It’s been reported that a dozen credit card companies are currently testing the model but that’s only a fraction of the number of companies lending. That being said, it’s important to understand that the way credit scores are figured will change in the coming months and years, and it’s important as a small business owner to make sure you’re keeping on top of it.