New FICO Credit Score Model Takes Hold

There’s a new sheriff in town, credit score-wise, and the impact on banking consumers could be substantial. Here’s what Fair Isaacs (Stock Quote: FIC) is up to, and how it matters to you.

The new Fair Isaac credit score model, called FICO 08, is now hitting second gear after Equifax Inc. (Stock Quote: EFX) became the second of three credit scoring giants to adopt the system this month. That’s big news given that, according to Fair Isaacs, FICO is used in approximately 75% of mortgage lending decisions and by 90% of the largest U.S. lenders.

FICO 08 was rolled out by TransUnion in January, and now that two of the three major scoring agencies are using the model, and more lenders are plugging in, more consumers can expect to see some new wrinkles – and maybe some new numbers – in their credit scores.

The new model was created after banks and lenders had complained to Fair Isaacs that they needed a more thorough, accurate method of estimated potential credit risk on the part of borrowers. According to Fair Isaacs, FICO 08 fits the bill for lenders and for consumers – it estimates that the new scoring model should cut consumer credit default rates by up to 15%.

Here’s what to look for in FICO 08:

High debt loads will hurt your score – Timing is everything, especially in finance, and banks and lenders are beginning to cap or limit the amount of credit available to consumers, thanks to the lousy economy. That translates into lower credit scores for people with high debt loads on their credit balances. The thinking here is that if your Bank of America (Stock Quote: BOA) Visa (Stock Quote: V) card has a $10,000 limit and that limit is cut in half to $5,000, your balance of $4,000 now eats up 80% of your credit limit. To FICO 8, high debt ratios are going to drag your score down more than ever.

A note: if you have high available credit, say $15,000 on a credit card, but have a low balance of $2,000, that’s going to be to your benefit. In the past, having ample access to credit made you more of a risk to other lenders. Not so much now. As long as your bills are paid on time, having a big chunk of open credit won’t affect your credit score as much as it has in years past.