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Late last month FICO announced its newest scoring model called FICO 08. Officially, all three credit bureaus have confirmed that they will soon begin using the new scoring method. FICO says that so far over 400 lenders have begun relying on FICO 08, which offers improved accuracy in the portrayal of credit risk. So what is FICO 08 and how will it help consumers?
FICO 08 is a much-needed replacement to the standard FICO model which has been in effect since the 1980’s and has remained relatively unchanged. FICO 08 is designed to give a more accurate look at a person’s credit worthiness by re-examining key pieces of information. For example,, authorized user accounts will no longer hold any weight under the new system, effectively eliminating the piggybacking practice that has been going on for years.
How will the new FICO 08 effect your credit score? The same numerical range is being used for FICO 08 (300-850) to make it easier for lenders to switch to the new system. The same parameters will also be used, meaning that on-time payments will still account for 35% of your score, and so on. A new premium will be placed on a mix of debts, meaning that individuals with a variety of installment and revolving credit will do much better than those with only credit card accounts. How your credit score will change depends on a number of things. If you’ve had major delinquencies, along with poor payment behavior with a number of accounts, you can expect your new FICO 08 score to drop by about 20-25 points. Likewise, if you’ve had a major delinquency but have shown a number of accounts in good standing, expect your FICO 08 score to improve to reflect your habits.
Here are some more examples of situations in which your score will now fall or rise.
- Occasional mess ups (such as late payments)
- Your score won’t be hit as hard if you apply for credit with a number of creditors
- Having a mix of credit types, such as a mortgage and auto loan
- Being 90 days late on one account while the rest of your credit accounts are in good standing
- Consistent mess ups
- Using your credit near its limit
- Being 90 days late while having delinquent accounts
According to FICO, this new scoring system will allow lenders to properly analyze risk and reduce the default rates on their loans to consumers by as much as 15%. FICO 08 will also be much kinder to consumers that occasionally miss a payment or go over their limit while putting stronger penalties on individuals that consistently miss payments or use credit irresponsibly.
So far it seems the biggest change to the credit scoring system is the previously mentioned elimination of piggybacking. This term refers to individuals that become authorized users on the accounts of people with excellent credit, “piggy-backing” their credit rating by raising their own artificially. Piggybacking became such a common occurance that you could often see individuals selling the opportunity to be added as an authorized user for as much as $200, repeating this as often as they wish as the first “renter” would receive the credit boost forever.
So far, the new FICO 08 system is shaping up to be a welcome change for many consumers that are tired of being unfairly punished for occasional missed payments or other small errors. This is the largest change to the credit scoring system in decades and will affect at least 60 million Americans. While you may see an immediate boost–or hit–to your credit depending on your overall habits, the long-term changes this new scoring method will bring about will be positive. Unfortunately, it may be some time before consumers see their scores reflecting this new system because it will take a while for the bureaus and lenders to work together to implement it.
More information about FICO 08, including the addition of two new population segments to make scoring more accurate, can be found by reading “Fico ’08 – We Live in a Credit Score Driven World – Get Ready for a Major Change.”