FICO 10T and VantageScore 4.0: What you need to know

Back in October of 2022, the Federal Housing Finance Association announced that it would require the FICO 10T credit score model and the Vandgaurd 4.0 model to be used by Fannie Mae and Freddie Mac. In furtherance of this announcement, the FHFA has also announced a multi-year phase in of the new score models, expected to be completed by the fourth quarter of 2025. So what does this mean for consumers?

What are FICO and VantageScore?

To understand the import of the new announcement, one must first have a general understanding the role FICO and VantageScore models play in the credit reporting industry.

Everyone reading this is probably familiar with the credit reports from one of the “big three” consumer reporting agencies (Equifax, TransUnion, Experian). We know that these reports contain information regarding a consumer’s credit history, including current and past credit accounts. This information includes payment history, balance history, current balances, as well as a history of hard and soft credit inquiries.

But what most consumers, and perhaps many lenders, care about most is the credit score derived from this information. This is where FICO and VantageScore come in. The credit reporting agencies (CRAs) compile the data on consumers, but do not produce a score themselves.

Traditionally, FICO has been the main player in the credit scoring market. It remains a dominant force in the market, as it claims to be used by 90 percent of “top lenders.” VantageScore, a joint venture of the big three CRAs, is FICO’s top competitor in the credit score market. Both FICO and VantageScore have gone over several revisions over the years, and lenders do not uniformly use a single version of the FICO or VantageScore scores. For credit cards and auto loans, the commonly used “FICO score” is FICO 8. However, both Fannie Mae and Freddie Mac use FICO 2, 4, and 5 depending on which consumer reporting agency is involved. Thus, consumers do not have just one “credit score.”

What will change with FICO 10T and VantageScore 4.0?

As it currently stands, many Americans lack any credit history whatsoever. A 2015 report from the CFPB estimated that as many as 18 million Americans were unscorable due to a lack of any prior credit history. The new scoring model will incorporate “alternative data” (where available) such as rental history, utilities payments, and telecommunications payments.

According to NCLC, the new model will also benefit consumers in other ways. For instance, bills which went to collections but were subsequently paid off will no longer impact a consumer’s credit score adversely. Additionally, the newly approved models lessen the impact of medical debt when compared with prior models.

Impact to FCRA litigation

So how does this impact the insular world of FCRA litigation? Of course any answer involves a great deal of speculation, but here are some things to watch.

The trend towards including Americans with non-traditional credit histories by tracking rental history, utility payments, and telecommunication payments could lead to many millions of Americans being eligible for credit. In turn, these individuals could be more likely to follow their credit reports closely. What’s more, because information such as rental history, utilities payments, and other non-traditional credit histories have not traditionally been compiled by CRAs, these particular inputs may be prone to greater error rates. All of these factors could drive up the number of potential FCRA litigants.

If NCLC is correct, and the new scoring models will not treat paid off collection accounts adversely, this could also be a ripe area for litigation. Collection companies have a business incentive to report outstanding debts to CRAs. When consumers notices these items on their credit report, they are more likely to be motivated to pay their balances. However, no similar business incentive exists for reporting that these accounts have been paid in full. While this has always been the case, it has not always been the case that paying a collection account in full eliminated the adverse impact on the consumer’s credit score. Thus, individuals whose collection accounts are not noted as having been paid off will have greater potential for damages then in recent history.

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CONSULT ON A CASE

The content on this website is informational in purpose, and is not intended to be legal advice. However, I am a lawyer with an active FCRA practice. I am available to consult if you are either (a) someone who is personally having an issue related to faulty information on a consumer report; or (b) if you are an attorney looking for assistance on a case.

Please shoot me an email at thiller@kennethhiller.com.