There is a new FICO credit scoring system called FICO 08 that was designed to better serve the credit industry. The two major changes are about small inconsequential infractions and people who piggyback onto others good credit history. This new scoring method has been in testing for the past 6 months by over 400 different companies.
Your credit score is a number, somewhere between 300 and 900, that is determined by your credit history and a basis used for predicting whether you will pay your debts. The FICO credit score is the most often used method in determining creditworthiness of individuals by credit granting companies. FICO stands for Fair Isaac Corporation and they created the first credit scoring system in 1958.
This FICO credit score was originally designed to address investments but was updated to rate individuals in 1970 when credit cards became more popular. The three major credit bureaus, Equifax, Experian, and TransUnion, use the FICO scoring method to provide information to many lending institutions. Both the credit bureaus and the lending institutions may add additional enhancements but the FICO score is usually the base used most often.
Lenders can use FICO credit scores to determine if an individual qualifies for a loan, the interest rate, and what their credit limits should be overall. No one knows the exact methods that are used to determine the actual FICO credit scores; it s a closely guarded secret. The main concern being that people will try and misrepresent information to mislead the scoring method.
The goal of this new credit scoring method was to lessen the impact of one or two late payments. Anyone can have a lapse of memory, or be on vacation, or even in the hospital when a payment is due and blow it. This type of scenario should not have a major negative impact on a credit score.
The new scoring system now ignores minor delinquencies of $100 or less or a single delinquency when determining your credit score that are over two years old. However, if there is long term evidence of tardy payments, it will still have a negative impact on your score.
Another change has to do with the amount of credit used or how close you are to your over all credit limits. As an example, if your overall credit limit has been determined to be $20,000 and you are at $18,000 in credit used, this will have a negative impact. This has always been a factor but more importance has been attached to that factor in the new scoring method.
Another area that has been adjusted is where one individual has piggybacked onto another individual s credit. The most common method for this type of scenario is when someone without credit or a low credit score is added to another individual s credit card account that has a better credit score. This practice is widespread and people actually sell this type of service.
In order to eliminate this type of practice, the new scoring system grants no advantage. The new FICO 08 scores will single out individuals who are named as authorized users and no credit for this practice will be assigned. This is a good example why the credit scoring methods are not disclosed to prevent this type abusing the credit system.
Not all lenders are using this new method but most will probably adopt it over the next year. Mortgage companies who use private investors, Fannie Mae and Freddie Mac, or normal conforming loans still have not adopted the new method. But most lenders in the auto, regional banks, and credit unions have started using FICO 8 scoring.
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