Almost a year ago, we wrote about the new FICO 08 scoring model that was initially planned for roll-out at the latter part of 2008. Besieged with lawsuits between its creator, Fair Isaac, and the three largest credit bureaus, the kickoff for the much anticipated new system is now slated for early 2009. For consumers, this could mean a minor boost– or bust– for individual credit scores.
In an attempt to fine-tune credit risk evaluation in these challenging times that creditors– and consumers- are facing today, the developer of FICO scores has made the most significant modification to it’s mathematical credit score model since it’s introduction in 1989. The Fair Issac company estimates that 40% to 50% of consumers may see a 20+ point variation in their score due to the new algorithm- and not necessarily in the positive direction.
The premise behind the revised scoring system is to reduce risk of defaults for creditors through improvement of the accuracy of predictability. Given that delinquencies or at their highest level since the 1992, the industry was searching for ways to improve confidence in credit scoring models and their results. FICO 08 is their proposed solution, and Fair Isaac estimates that predictability of default will be improved by up to 15%.
Although FICO 08 is geared toward helping creditors primarily, there are some definite improvements for consumers as well, including:
Authorized Users information still considered. Fair Isaac initially said FICO 08 would no longer consider “authorized users” in their formula, a practice commonly known as “piggybacking”. After a rather large consumer outcry and potential credit fairness issues, Fair Isaac backed off and decided some authorized-user information would be included.
Small Collection Accounts Disregarded. Accounts with debt less than $100 (must be original amount) are ignored. This is a big plus for individuals who simply had a bad day and forgot to pay off a parking ticket or similar minor debt, but otherwise have good payment history.
Considers Single Credit Mishaps. If you only have one major negative issue on your credit report, as opposed to a string of items major and minor, the new model apparently will be more forgiving to these individuals.
Amount of Available Credit You Use Is Weighted More Heavily. The changes that are likely to “bite” you include the amount of available credit you are using. With the clamp-down in maximum credit limits that many card issuers are implementing carte-blanche to consumers, you could see your scores plunge, regardless of whether you carry a balance.
Having Fewer Open, Active Accounts Hurts Your Score More Another potential affect to consumers is that the new scoring formula responds more negatively if card users have fewer open, active accounts. Because more credit card issuers are shutting down unused and unprofitable accounts, that boosts the chances of damage to your scores.
So what affect will the new scoring model have on you? Time will tell. To quote a very appropriate adage, the only certainty in this life is that there will be change. (or maybe it’s that change is the only sure thing in life)– who remembers. Bottom line is it’s coming and you should be aware of it and act accordingly. Good luck!!
Related posts:
- Is the Credit Scoring System Fair? A Viewpoint Which Disagrees I’ve heard many people complain bitterly about the American credit...
- Experian Cutting off Consumer Access to FICO Scores Yesterday, I was surprised by an announcement from Experian, who...
- How Much Credit is Too Much? When starting your credit history from scratch, rebuilding from a...
- Many Mortgage Lenders Have Yet to Adopt FICO 08 When Fair Isaac Corporation (FICO) rolled out their “new and...
- Is the Credit Scoring System Fair? A Viewpoint Which Agrees I’m a good debater – I can make an argument...
This is some great information. I appreciate you explaining the changes in terms we can all understand.
How about let the Gov’t run the whole credit scoring/credit bureau system rather than this “Fair” Isaac and see if regulating it would be advantageous to us all as a whole(the economy, debtors and yes even the creditors)
What do you guys think of this proposal?
It’s hard to say what would be best. But something needs to change.
I agree – I have always thought that this whole FICO credit score system needed revamping and regulating – consumers are being hurt *and cheated) by it everyday. For example, someone explain to me why, if we pay our balances off in full every month, just because the credit card companies report to the credit bureaus our balances on the day they close our billing cycle and mail the statements out (which is the same day they report balance and status to the bureaus, in the case of my Citibank and Chase accounts), why this balance should be the one that FICO uses to determine our debt to available credit ratio. If I have a $5,000 credit limit on a card and charge $4,000 during a business trip, the card company will report my balance as $4,000 as of the date my statement was printed – then FICO dings my credit score because it looks like I’m carrying 80% of my ratio being tied up rather than their preferred 25% or 30%. What neither the credit card companies or bureaus or FICO take into account is the $4,000 payment I just sent in 5 days after I received my statement, bringing me back down to a zero balance. I think the credit card companies should have to re-report your accurate balance as soon as you make a payment. Then, when the next billing cycle posts and they again inform the credit bureaus of your new information, if you didn’t charge anything new on your card and your balance is still zero, then great – your FICO score will reflect that. But if you charge anything during the new billing cycle (ie, use your credit!), once again, your balance will be reported as not zero. So this crazy reporting system never reflects your payments in full and zero balances, only whatever your balances are the day your billing cycles close. FICO constantly treats you like you have a balance all the time, when perhaps you only had it for a week and then paid it in full a week later. The whole system is messed up and way too much emphasis is placed on what our balances are in determining our credit score. The only thing FICO should be concerned with is the payment history and whether we pay on time or not. That is the true test of someone’s credit worthiness – are they good for the money or not.
However, I am glad to see that FICO will not give as much credit score enhacement to authorized users now – nor should they. Being put on someone else’s credit card account when they’re not the one who makes the payments, is a joke. A married couple are usually joint holders of an account therefore both should get full credit in their FICO scores for that, but if a spouse doesn’t want to be legally liable for their husband’s or wife’s balance on a certain account, then they should not have the benefit of having that account count in their FICO score. Only the credit one obtains in their own name under their own social security number and that they are legally liable for should be used to determine credit worthiness scores.
Just my thoughts…..