The way your credit score is determined is about to change and for many of us it can be to our benefit. Fair Isaac Corp., the maker of the FICO credit score indicator that is used by the majority of lenders has recently introduced a new model, FICO 08. FICO 08 was created in response to lenders complaints that they needed a more exact way to determine if a person is a good credit risk. The new FICO 08 is estimated to help lenders reduce default rates in consumer credit by 5% - 15%.

This new system of calculating your credit score is a welcome change to lenders who are currently experiencing major defaults in home loans and seeing a rising trend in consumers defaulting on other loans such as car loans. As the loan market tightens, lenders want to be able to better judge a person’s ability to keep current on their debts. Fair Isaac feels that FICO 08 will be more exact in helping lenders judge a person’s credit.

Changes in the Credit Score System

Under the new FICO 08 system credit scores will still range from 300 to 850, the higher the score, the better. Your score will still be judged by many of the same factors as it is now, such as indebtedness, payment history, recent credit openings and length of your credit history. But FICO 08 will fine tune a person’s credit score to a more exact number than it is doing now, weeding out the good risks from the bad risks among those with newer credit histories or subprime borrowers.

Under the previous way of judging your credit score you were penalized for having large amounts of open credit available along with your debt totals. If you possessed a home mortgage, car loan and three credit cards with the availability of $5,000 credit on each, your score would go down even if you had little or no balances on the open credit cards. The fact that you had $15,000 available to you made you a risk when you applied for another loan. But under FICO 08 your score will go up if you have several loans and credit cards and you are keeping each current. This shows lenders that you are a safe risk because you are consistently making your payments on time. Your score will go down, however, if you carry high balances on several credit cards, even if you do keep them current.

FICO 08 will also change the way your credit score reflects late payments on loans. In the past your credit score would lower when you made late payments on a loan or credit card. With FICO 08 your entire credit history will be taken into account before lowering your score. If you are late making payments to only one account but are in good standing with your other credit cards and loans, then you will not be penalized as strongly as before. However, if you are delinquent on several accounts your score will go down.

Another change is you will no longer be able to raise your credit score by attaching your name to a person’s account that has a high credit score. For example, currently a younger person who is an authorized user on their parent’s credit card will automatically benefit from their parent’s good credit score when applying for a loan. Under the new system these user accounts will no longer apply to the user’s credit score. Of course, this change will negatively affect legitimate users such as married couples who share a credit card. For this reason it is even more important for couples to have credit in both names so both husband and wife build a credit history of their own.

Overall the proponents of the new FICO 08 credit system say that the majority of people will see their credit scores rise instead of fall. This new system is meant to highlight the high risk borrowers so lenders are able to weed them out when they apply for loans. Those with strong credit histories will find their higher score will help them qualify for lower interest rates on future loans.

Having a high credit score will save you thousands of dollars in interest when you make high-end purchases so it is important to keep an eye on your credit report to make sure everything is accurate and current. If your credit is in good standing now you can look forward to continue maintaining your good credit under the new FICO 08 scoring system and enjoy the benefits that good credit allows you throughout your lifetime.

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