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.

Less debt activity could hurt you – Yes, it sounds contradictory, but apparently Fair Isaacs is going after the “Goldilocks and the Three Bears” scoring model – not too much debt and not too little. On the lighter end, if you only have one or two credit accounts open, that could whack your credit score down a few notches. FICO 08 has a “limited history” factor that penalizes credit users who only have a few, open accounts.

The $100 club – FICO 08 is deep-sixing negative scoring on collection amounts less than $100. In the past, an old, unpaid $79 phone bill could inflict some damage on your credit report. Now, anything under the magic $100 mark won’t factor in to your score.

One mistake won’t kill you – The new Fair Isaacs model will go easier on consumers who have made one isolated mistake, like a furniture repossession, a one-time late credit card payment, or one-time charge-off. As long as the consumer’s other accounts remain in good standing, one-time, negative non-payment incidents won’t count as much against your credit score.

Banks should embrace FICO 08, as it promises to reduce default rates. Plus, any credit scoring model that does a more accurate job of identifying good credit risks (and bad ones) will help banks make better loans.

For borrowers, Fair Isaacs is touting FICO 08 as a consumer-friendly model that should actually push up the average credit score. But some consumer credit tenets are timeless – if you’re a high-risk borrower with a history of late payments, FICO 08 won’t change that. Conversely, if you pay your bills on time and prove to be a good credit risk, FICO 08 will continue to reward you with a credit score in the 700’s.

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