Recognizing and acknowledging deserved acknowledgment in credit matters

In a significant shift for the credit industry, the Federal Housing Finance Agency (FHFA) has announced that lenders can now use a second credit scoring methodology for government-sponsored Fannie Mae and Freddie Mac mortgages. This move comes as part of an ongoing process to expand and modernize credit scoring models, which began in 2014.

One of the key changes in these new models is the consideration of Buy Now Pay Later (BNPL) lending, a type of small loan that allows consumers to split payments on everyday purchases over a short period. FICO, a leading player in the credit scoring industry, has announced the release of two new versions of its scoring algorithm, FICO 10 BNPL and FICO 10 T BNPL, expected to be available to lenders this fall.

The inclusion of BNPL lending can help reduce "phantom debt" - debt that isn't reported to the credit agencies. This is important as at least 14% of adults had used BNPL in the past year, according to a 2023 survey by the Federal Reserve Board.

Meanwhile, FICO 9, FICO 10, and all versions of VantageScore have the capacity to consider rent payments in their scoring. Consumers are increasingly pushing for their rent payments to be reported to credit agencies, and a surge in third-party services now allows them to do so directly. On-time rent payments can improve an individual's credit score, providing a more comprehensive view of their financial situation.

It's worth noting that these new models are designed to provide lenders with a clearer picture of an individual's financial situation. FICO notes that credit usage has increased over the years, and if the models weren't updated, "seemingly normal credit usage today would be considered a higher risk than in years past."

Lenders are not required to choose the latest version when assessing creditworthiness. However, Upstart, a new lender, has already used the new credit scoring methodologies VantageScore 4.0 and FICO 10 T for its assessments.

Unfortunately, 45 million people either have no credit history or too small of one to produce a credit score. The new models aim to address this issue by providing a more inclusive and accurate assessment of an individual's creditworthiness.

The second credit scoring methodology announced is VantageScore 4.0. Both VantageScore 4.0 and FICO 10 T are the latest versions of each company's credit scoring models. FICO Scores, introduced in 1989, have been required for Fannie Mae and Freddie Mac since the mid-1990s.

These developments in credit scoring are set to bring about a more nuanced and comprehensive understanding of an individual's creditworthiness, taking into account modern financial practices such as BNPL and rent payments.