The way consumer credit scores are calculated has changed. The Fair Isaac Corp. – creator of the FICO score – announced on January 29 that their new scoring model for determining credit scores, dubbed FICO 08, has been instituted and Better Business Bureau offers advice to consumers on how their credit score might change and what they can do to maintain a healthy credit rating.
FICO scores – which range from 300 to 850, with higher scores being better – are based on consumers’ credit histories and reveal their risk for defaulting on loans. A good credit score is anything higher than 700. Average FICO scores for U.S. consumers are around 690. More than 90 percent of the 100 largest banks rely on FICO scores in determining both who they will lend to, and at what rate.
“The new formula is more forgiving of minor slip-ups and should more accurately predict a borrower’s risk of defaulting on loans. The good news for consumers is that the Fair Isaac Corp. predicts that more people will see their score increase than decrease,” said Steve Cox, BBB spokesperson. “FICO 08 is a welcome sight in this tough economy as Fair Isaac also predicts its new system will help lenders reduce default rates on their consumer credit by between 5 percent and 15 percent.”
In calculating scores, FICO 08 will continue to take into consideration factors such as a person’s financial history including indebtedness, length of credit history, and number of open lines of credit. The difference with FICO 08 is the weight these factors will carry. The Fair Isaac Corp. explains that two people with the same score today could have completely divergent scores under FICO 08.
Little Slip-Ups Hurt Less.
Debts less than $100 will not have as large a negative impact on a consumer’s score.
Looking at the Big Picture.
FICO 08 will take a more comprehensive look at a consumer’s credit history. This way, one negative aspect of a person’s credit history will not necessarily destroy their credit rating.
Restrictions on Piggybacking.
Piggybacking is when a credit card holder with good credit let’s another person, perhaps with lousy or no credit, be an authorized user of the card. The good credit of the card holder would then have a positive impact on the other user’s credit. In order to reduce fraud associated with piggybacking, FICO 08 restricts piggybacking to only the card holder’s family
Less Available Credit and Closing Accounts will Hurt More.
Before FICO 08, if a consumer had a history of using most of his or her available credit, it had a negative impact on their score; now that impact will be even larger. Also, having too few open accounts, a number of inactive accounts or closing accounts will have a more significant negative impact.
Varied Lines of Credit will Help
Having varied lines of credit—such as a mortgage, a car loan, or school loans in addition to credit cards—will have a positive affect on a credit score.
BBB encourages consumers to request a free credit report once every 12 months, and people can do so at: www.annualcreditreport.com. Consumers can get a free report from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. Obtaining an actual credit score may cost consumers a few dollars, but for those who are concerned about their credit score, the cost is minimal compared to the cost of not getting a loan, paying higher interest rates or not being considered for a new job.
For more information on being a responsible borrower, and for reliable advice on how to increase FICO scores, visit www.bbb.org.