What FICO's credit-score shakeup really means for home buyers

By Aarthi Swaminathan

Credit scores play a central role in people's lives.

Fair Isaac Corp., or FICO, has dominated credit scoring until recently.

The credit-scoring industry is going through a big shift as companies compete to gain more power over the market - and prospective home buyers should pay attention.

The latest move comes from Fair Isaac Corp., or FICO (FICO), which is giving mortgage lenders a way to obtain borrowers' credit scores directly while cutting out the big three credit bureaus, which have historically packaged them for those lenders.

This could be good news for consumers, Chi Chi Wu, a staff attorney at the National Consumer Law Center, told MarketWatch, given the immense influence that credit bureaus have had over millions of consumers' personal finances. At the very least, Wu said, it "can't hurt."

The mortgage system has relied on FICO as its sole credit-scoring model for decades to figure out how likely a potential borrower is to pay back a loan on time. That FICO credit score impacted not just a home buyer's mortgage rate, but also their loan amount and ability to qualify for certain loans.

Meanwhile, the housing market has been challenging for home buyers in recent years, with home prices and mortgage rates remaining elevated. Home sales have been relatively stagnant as housing remains unaffordable for most potential buyers.

Against that backdrop, any attempts to cut costs for mortgage lenders - which could theoretically pass their savings along to borrowers - is likely to be a welcome change.

While it is still too early to tell if consumers will actually see lower costs, this cutting out of the middlemen is "a step in the right direction," Bob Broeksmit, chief executive and president of the Mortgage Bankers Association, an industry trade group, said in a statement.

The group has called for reforms that "support a better credit-reporting system that promotes more competition, efficiency and lower costs for consumers," he added.

Read more: Credit-bureau stocks like Equifax's are getting hammered as FICO moves to directly license mortgage scores

Here's what is happening in the credit-scoring world, and how it impacts people applying for a mortgage right now.

How do FICO scores affect mortgage approval and rates?

When a home buyer applies for a mortgage, a FICO model pulls information on their file from each of the three major credit bureaus - Equifax (EFX), Experian (EXPGY) (UK:EXPN) and TransUnion (TRU) - to come up with a credit score.

FICO factors in a person's payment history, amount of debt owed, length of credit history and more. It pulls all this information into a secret algorithm and generates three credit reports and scores. Those three FICO scores are purchased by the credit bureaus and then by resellers, who supply a credit report to the lender.

Mortgage lenders then take the score and use it to determine whether to approve a borrower for a mortgage, as well as the interest rate they will offer. Lenders have not been able to purchase FICO scores directly from FICO.

About 90% of top lenders in the U.S. use FICO scores, according to the company.

Credit bureaus also offer VantageScore as an alternative credit-scoring model to FICO. VantageScore includes other variables when calculating one's score, such as on-time rent payments.

Equifax, Experian and TransUnion did not immediately respond to requests for comment.

How does FICO make money?

People taking out a loan don't directly pay FICO for their credit scores. Resellers and, subsequently, lenders pay for it, and they pass on those costs to borrowers in the form of fees - and those fees have been climbing.

When lenders request credit scores, they have historically obtained it from the resellers, not from FICO directly. For its role in creating those scores, FICO collects a per-score royalty from a credit bureau. That royalty amount jumped from $0.60 in 2018 to $4.95 in 2024 - a 725% increase in six years.

VantageScore vs. FICO

In July, the federal government disrupted the current system by allowing mortgage lenders to use a second credit-scoring model, VantageScore, which was created in 2006 by the three main credit-reporting bureaus.

Bill Pulte, director of the Federal Housing Finance Agency, said that housing-finance giants Fannie Mae (FNMA) and Freddie Mac (FMCC) would be able to use VantageScore, which takes into account factors including on-time rental payments, to evaluate a borrower's creditworthiness. Fannie Mae alone backs 1 in 4 mortgages in the U.S.

"My ORDER today (thanks to my boss, POTUS) will allow for Americans to use their RENT to qualify for a mortgage," Pulte wrote on X in July. "Credit history will no longer just include credit cards and loans. This is HUGE."

That move directly challenged FICO's influence over the mortgage market. Months later, FICO decided to cut out the bureaus from the process.

FICO announced Wednesday that it would offer resellers the ability to buy FICO scores straight from the company, removing any markups that credit bureaus might have charged.

"This shift will drive price transparency and immediate cost savings to mortgage lenders, mortgage brokers and other industry participants," the company said, which could then be passed on to the consumer.

Matt Schulz, LendingTree's chief consumer finance analyst, was less certain that consumers would see any benefit.

"This looks like it is more about FICO and their clients in the mortgage business than it is about the average home buyer," he said. "FICO is saying that it will save mortgage lenders and brokers money immediately, but whether that translates into any savings for the consumer is unclear."

Why consumers should pay attention to the credit-scoring industry

Although the average home buyer is unlikely to feel much of a direct impact from the recent FICO change, they should keep an eye on the credit-scoring industry given the importance of credit scores in their financial lives.

In 2024, the top issue consumers complained about was problems with a credit report or credit score, according to a report by the Consumer Financial Protection Bureau, a federal consumer watchdog. Consumers submitted about 2.7 million complaints about credit reports and scores, making up about 85% of all complaints received.

Credit scores have a far-reaching impact on people's lives - affecting everything from credit cards, to insurance rates, to mortgages, to even rental applications.

"People are frustrated with their credit reports and credit scores," the National Consumer Law Center's Wu said.

-Aarthi Swaminathan

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10-02-25 1755ET

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