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 is soon being substituted with FICO 9. The 550d was announced in 2022 and is already being tested by 12 from the largest U.S. credit-card issuers, according to the Wall Street Journal. Widespread adoption is anticipated to begin after this season, and it will affect many small business owners seeking capital and loans.
What's Changing
The great news for many:
Fico 9 will provide scores for perhaps 15 million individuals who currently can not be scored, simply because they aren't using credit or can't get credit. FICO 9 will do this by taking a look at how you've paid your gas, electric, cellphone, and cable bills to find out your payment background and therefore a score. FICO 9 will even take a look at medical debt, something often totally out of our control, with less weight than regular debt. In addition, paid medical collections will appear reduced faster than before from the credit history. FICO 9 will raise the median score by 25 points of consumers whose only major negatives are medical collections.
The not so good news for some:
FICO 9 will not immediately be adopted by all lenders, so if you're one of the “scoreless”, it might be a few years before you see the full benefits. FICO 9, as stated above, will start taking a look at utilities, therefore if you've been juggling bills, paying “reportable” bills first and letting “unreportable” bills wait a few weeks without having to worry concerning the credit consequences, your behaviors will need to change. Otherwise your credit will be affected. FICO 9 will even take a look at how often your address changes. Frequent address changes have a negative effect upon your score since it's generally regarded as an indication of instability.
The Reality
Although FICO 9 and its new scoring model happen to be released, i am not saying scores will change quickly. The reporting mechanism isn't fully in place for utilities and telecommunications, which means this data will be difficult to find for a lot of small business borrowers. Even though 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 the dozen credit card companies are currently testing the model but that's only a fraction from the number of companies lending. That being said, it's important to understand that the way in which credit scores are figured can change within the coming months and years, and it's essential as a small business owner to make sure you're keeping over it.
