How FICO Credit Score changes will affect your credit standing
The company that cooks up credit scores for millions of Americans is changing its recipe — and that could affect how easily you get credit.
Fair Isaac Corp., creator of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan.
For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts the its new system will help lenders reduce default rates on their consumer credit by 5 percent to 15 percent.
The rollout comes at a time when lenders say they are eager for more accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall.
And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.
FICO score used by 90 percent of the 100 largest bank
The FICO score, which Fair Isaac says is used by 90 percent of the 100 largest banks, and similar scores hold sway over the lives of millions of people.
Financial institutions use them to determine the granting and pricing of credit, insurance, cell phone use and, in some cases, employment and utility services.
The wonder whether they are valid measures of credit risk for some groups of consumers, especially minorities and lower-income individuals, says Travis Plunkett, legislative director for the Consumer Federation of America.
Fair Isaac, based in Minneapolis, says it believes it does a good job of explaining the factors that go into its calculations and in guiding consumers on how to manage their scores.
Fair Isaac, which last revamped its scoring model earlier this decade, says it is accelerating its FICO 08 rollout, partly in response to lenders’ demand for better risk-management tools.
Scores still will range from 300 to 850 — the higher the better.
New Credit Score Model Does Better Job
And the model will look at the same factors — including consumers’ level of indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores.
But the new model will more finely slice and dice the information in consumers’ credit files to do a better job of separating the "good risks" from the "bad risks," particularly for subprime borrowers; those with "thin," or young, credit files; or consumers who are actively seeking new credit.
"Consumers who are low-risk will score better with the new FICO version, and consumers who are high-risk will score lower," says John Ulzheimer, president of consumer education for Credit.com, a personal-finance Web site.
Higher-risk borrowers may find it tougher to get credit, while those with less risky profiles — though they may have been approved for credit accounts in the past — will start to get better deals from lenders, he says.
Despite the new scoring model, consumers still have to make sure the information in their credit reports, which Fair Isaac relies on to come up with its score, is accurate.
If a consumer feel a FICO score is unfair, he or she would have to go to the individual credit bureaus — Experian Group Ltd., TransUnion and Equifax — for a copy of the credit report on file and look for errors or missing information.
- Source: Jane J. Kom, FICO credit score gets makeover, The Wall Street Journal, Dec. 21, 2007 — Summarized for you by Credit Card Report
