Fair Isaac's FICO 08 "New and Improved" Scoring Model
Last Updated September 12, 2009
The credit scoring system was modified again in 2008, as Fair Isaac Corporation, developer of the FICO credit score rolled out a new "improved" version called FICO 08. A demand by users for a better way of analyzing risk in the wake of rising mortgage defaults and consumer credit delinquencies was the catalyst for Fair Isaac Company to develop the revised formula. The third formula "upgrade" that Fair Isaac has released since inception,
the new formula has now been available in varying degrees in the credit scoring market for a little over a year. Two of the three major credit bureaus, TransUnion and Equifax (Experian quit offering FICO scores to consumers in February) now offer FICO 08
scores to consumers and businesses. But the question is, has FICO 08 been embraced by lenders and is it being used on a widespread basis?
The answer as of this lastest update is "not yet". Mortgage lenders doing traditional conforming loans backed by Freddie Mac and Fannie Mae
have not made the move to FICO 08 yet, presumably due to the fact that mortgage giants Fannie Mae and Freddie Mac have not yet approved its use.
However, the new scoring model has been adopted by many credit-card companies, auto lenders, regional banks and credit unions, at least according to John Ulzheimer (a previous Fair Isaac employee, now with credit.com).
Ulzheimer also indicated in a recent marketwatch article that he expects Freddie and Fannie to adopt FICO 08 by the end of the year, although neither FNMA or FMAC have confirmed this.
FICO 08 utilizes the same numerical range as the classic FICO scoring system, 300 to 850, with higher scores indicative of lower credit risk. According to Fair Isaac, FICO 08 should result in a minimal increase for most consumer's credit scores as compared with the current FICO system. They say the new FICO 08 formula takes a more refined look at people who have credit problems, giving some leniancy to those consumers who had only experienced one serious credit setback. As long as their other active credit accounts are in good standing, a single charge-off or repossession for instance will not hurt them as significantly as it does under the classic FICO scoring formula.
A summary of the major differences in the FICO 08 Credit Scoring Formula:
- A "moderate" level of credit inquiries will be less detrimental
- High balances on existing credit cards may hurt more
- "Piggybacking" or "authorized user" loopholes will not be allowed
- Acively utilizing existing credit accounts will increase in importance
- A combination of installment and revolving credit accounts will be optimal
What does this all mean? FICO predicts that the new FICO 08 scoring system will help lenders reduce default rates on consumer loans between 5 and 15 percent. They indicate that FICO 08 should be less strict on consumers who make the occasional slip, while coming down harder on those with multiple offenses. For example, it will give a slightly higher score than previously to a borrower who is late on one payment obligation but current on multiple other accounts. Those with several delinquent accounts could find their credit score reduced.
The FICO 08 formula still takes into account the same factors as the classic version namely on-time payment history, length of credit history, amount of debt, ratio of debt to available credit, type of debt, and any excessive amount of recent new credit (of course definition of excessive is unclear). One will also receive a higher score for the "optimum" mixture of credit debt. For example, a consumer with both revolving and installment credit will score higher than one with strictly credit card (or revolving) debt.
Another signficant change in FICO 08 involves the practice of "authorized users." An authorized user is a consumer who is not responsible for paying a credit card, but that card's history is reported on the user's credit as well as on the owner's credit. It is a common practice for parents to make children authorized users of their cards in order to help them build credit. Additionally, many spouses obtain the bulk of their credit histories from being authorized users of their husband's or wife's card.
In summary, the revised FICO 08 credit score is gradually being adopted by some financial and lending institutions, but does not sound like it will become the industry standard for lenders anytime soon. If in fact Fannie Mae and Freddie Mac approve its use, this could quickly change. We will keep you posted!
Here is an interesting article from The Washington Post on multiple credit scoring issues associated with the current credit crunch. Here is another blogger's take on this change.
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