A new formula could see credit scores jump by 25 points, but that's only possible if lenders decide to adopt it. NY1's Tara Lynn Wagner filed the following report.
Your FICO score is a three digit number that speaks volumes about your credit history. Banks use this score to determine whether or not to lend you money and at what rate.
"A higher score gives you a better chance to get a better mortgage on better terms," says Hiten Samtani, reporter for The Real Deal.
Most lenders use it—90 percent according to the Fair Isaac Corporation, which issues the score.
There's one problem, though.
"There are more than one FICO score. There's many," says credit coach Jeanne Kelly.
Now, there's one more in the mix. FICO Score 9 introduces a few changes to the way the number is calculated. For one thing, medical debt that is sent to collections will no longer carry as much weight.
"There's been millions of Americans out here who have, for the most part, a very decent credit history but then they have this one big, fat medical debt, and that's hampered what they can get in terms of a loan, what they can get in terms of an interest rate," says Samtani.
Samtani says the new calculation also favors younger consumers and first time buyers whos credit history is not that deep. And the last big change, once a debt is paid or settled, it's done, regardless of whether it went to collections.
"Collections that are paid through a collection company won't even be calculated in the score," says Kelly.
FICO analysts say the new formula could see credit scores jump by as much as 25 points.
Here's the catch, though: it could take years before this new score is actually in use.
He says it all comes down to whether or not Fannie Mae and Freddie Mac decide to adopt it, and they're not even using FICO 8 yet.
"They're still mulling using FICO 8, so if FICO 9 is out there and they're still mulling using FICO 8. That doesn't bode very well for it to come into place. If Fannie and Freddie don't set the agenda, it's very unlikely that the banks will do anything about it," Samtani says.
In the meantime, Kelly says: get a copy of your credit report and clean up any errors.
"So the bottom line is you want to pay attention to your credit report and what's reporting on there, so no matter what score is used, it's always going to be a healthy credit score," Kelly says.
For a free copy of your credit report, visit annualcreditreport.com.