FICO, the credit scoring giant has developed a new credit scoring model promising to better evaluate risk. The FICO score is the credit score most widely used by lenders, with over 90% of the nation’s largest lenders using it. FICO (formerly known as Fair Isaac) updated its credit scoring model in January 2009, and it is gradually being rolled out to lenders as a better way to predict risk. FICO 08, claims to increases predictive accuracy on if consumers defaults by up to 15%, with more analytics focusing on consumers who have recently sought new credit and those with prior credit blemishes.
So what do these changes mean to you? Well depending on your circumstances it could mean a higher or a lower score.
Here is an overview of the changes:
Upgraded Score Card Segmentation
- Increased segments to 17 instead of 12 on older versions
- Enhanced precise analytics on each consumer group
Refined Risk Score Characteristics
- Isolated derogatory events now carry less weight in the calculation of scores. However frequent late payment offenders will now see a much more negative drop in their FICO scores.
- Even more emphasis has been placed on the relationship between credit card balances and their limits. Now more than ever—the lower the balance the better!!!!!
- More emphasis has been placed on a “healthy mix” of credit. Borrowers with different types of credit accounts – credit cards, mortgages, and auto loans – will be rewarded more positively under the new score calculation, while those with only one or two types of accounts may actually lose points.
- Borrowers should have more active good-standing accounts than closed accounts.
Mitigation of Authorized User (Piggybacking) Abuse w/Continued Support of Regulatory Requirements
- The treatment of Authorized User accounts has been updated to block abusive brokered accounts. FICO claims they have a system that will eliminate these types of abused AU account, while still providing the benefit to those who obtain AU status the way it was intended, such as parents to children and spouses.
Minimized Minor Collection and Public Record Infractions
- Collections for debts with original amounts under $100 will no longer be considered in your credit score. This is a welcome change for anyone who has been surprised by a sudden score drop due to small and possibly unanticipated issues like collections for medical bills, parking tickets, or library fines.
What Remains the Same with FICO 08
Other than what’s been mentioned above, FICO 08 remains the same as with previous versions of the scoring model.
- FICO scores will still range from 300 to 850 with higher scores being better.
- FICO 08 continues to look at the same categories to calculate your credit score:
35% payment history
30% credit utilization
15% credit age
10% recent applications
10% mix of credit
- Authorized user accounts will continue to be included in FICO 08 credit scores, but the new model will make a distinction between legitimate authorized user accounts and those that were purchased for credit improvement purposes only.
- Your FICO 08 score will continue to be based on information in your credit reports from the three major credit bureaus.