The FICO® system, whose credit scores lenders use to determine whether you're credit-worthy and how favorable to set the terms, is set for a makeover. An article in Wall Street Journal reveals more of the changes in store than previously disclosed. Here's what they are and how they'll affect your credit score:
Changes Planned in FICO® 08
The primary reason for the planned switch to FICO® 08 has to do with the forecasting powers of the new model. Fair Isaac believes that FICO® 08 will do a better job at predicting the likelihood of default on a loan by making two changes to its existing model:
• Authorized Users - An authorized user is a person that is permitted by another account holder to use their account. Normally, this situation applies to a family member who is trying to manage credit for the first time, such as a college student. The new scoring model eliminates "piggybacking" which allowed individuals with bad credit to leverage the payment histories of "stronger" credit card holders by becoming an authorized user on their accounts.
• Delinquencies - The second change in the scoring model has to do with payment patterns -especially those that are greater than 90 days late in making a payment.
The FICO® 08 model will be more forgiving to consumers that are in arrears in one area, but have a number of other accounts that are in good standing. Fair Isaac predicts the above two changes will reduce the default rates on consumer debt by 5 to 15% for those companies switching to the new model. Impact of FICO® 08 on Credit Scores Upon hearing of possible changes to the credit scoring process, many consumers will be looking for the answer to the question: How will FICO® 08 affect my credit score?
Keep in mind that credit scores are used by many lenders to determine the amount of credit to extend a borrower. These creditworthiness thresholds are usually based on pre-determined bands of credit scores. To make it easier for lenders to adopt FICO® 08, the new scoring model will retain the same numerical range (300 - 850), minimum scoring criteria, and parameters as the prior model.
+ situations where scores will rise, - situations where scores will fall
+ Mess up every so often
- Consumers who consistently mess up
+ Won't get dinged as hard when you apply for credit from multiple sources
+ Having a mix of credit types, like having a credit card, mortgage, and auto loan at the same time
- Spending near the limit of your total available credit
+ If you're 90 days late on payments on one account and your other credit accounts are in good standing
- 90 days late and you have other delinquent accounts
- Being an authorized user on someone else's account with good credit will no longer help your score
Changes Planned in FICO® 08
The primary reason for the planned switch to FICO® 08 has to do with the forecasting powers of the new model. Fair Isaac believes that FICO® 08 will do a better job at predicting the likelihood of default on a loan by making two changes to its existing model:
• Authorized Users - An authorized user is a person that is permitted by another account holder to use their account. Normally, this situation applies to a family member who is trying to manage credit for the first time, such as a college student. The new scoring model eliminates "piggybacking" which allowed individuals with bad credit to leverage the payment histories of "stronger" credit card holders by becoming an authorized user on their accounts.
• Delinquencies - The second change in the scoring model has to do with payment patterns -especially those that are greater than 90 days late in making a payment.
The FICO® 08 model will be more forgiving to consumers that are in arrears in one area, but have a number of other accounts that are in good standing. Fair Isaac predicts the above two changes will reduce the default rates on consumer debt by 5 to 15% for those companies switching to the new model. Impact of FICO® 08 on Credit Scores Upon hearing of possible changes to the credit scoring process, many consumers will be looking for the answer to the question: How will FICO® 08 affect my credit score?
Keep in mind that credit scores are used by many lenders to determine the amount of credit to extend a borrower. These creditworthiness thresholds are usually based on pre-determined bands of credit scores. To make it easier for lenders to adopt FICO® 08, the new scoring model will retain the same numerical range (300 - 850), minimum scoring criteria, and parameters as the prior model.
+ situations where scores will rise, - situations where scores will fall
+ Mess up every so often
- Consumers who consistently mess up
+ Won't get dinged as hard when you apply for credit from multiple sources
+ Having a mix of credit types, like having a credit card, mortgage, and auto loan at the same time
- Spending near the limit of your total available credit
+ If you're 90 days late on payments on one account and your other credit accounts are in good standing
- 90 days late and you have other delinquent accounts
- Being an authorized user on someone else's account with good credit will no longer help your score
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