FICO 08 ??How the Newest FICO Scoring Model will Affect Your Credit Score

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FICO 08 ??how the newest FICO Scoring Model will affect your credit score
2 years ago
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Fair Isaac has been working on a new credit scoring model for well over a year. It was originally slated to become active in second quarter of 08 but was delayed by a lawsuit with Equifax. Differences have been settled and FICO 08 is ready to roll in 2009, with TransUnion becoming the first to use it by the end of January.

The FICO score is currently used by at least 90% of major U.S. lenders and plays a large part in mortgage loan decisions. With this in mind, Fair Isaac has endeavored to create a scoring model that will provide a more accurate measurement of credit risk and predict a borrower's inclination to default on high-cost items such as mortgages.

The FICO 08 credit scoring model has some interesting changes ??both in favor of the consumer and against. Some things will remain the same, such as the actual scoring range of 300 to 850, length of credit history, debt amount and scores for any payments made on time.

In response to the glut of unscrupulous credit repair scams that piggy-backed user accounts to attain higher credit scores, FICO 08 will crack down on authorized user accounts. While it's not clear how this will work, speculation is that spouses and children can still be added as authorized users.

Due to the current state of the economy, credit card companies are lowering limits on credit card accounts and closing down unused accounts. Revolving lines of credit, such as home equity loans are also shrinking. FICO 08 is more responsive to credit utilization. It will penalize consumers who max out their credit limits every month. So, if your credit limits have recently been reduced or if you spend over 30% of the total limit each month, then you'll likely see your credit score go down when FICO 08 is implemented.

You can prevent this by paying down the balance on your accounts. Keep in mind that for credit scoring purposes, it's better to have several small balances with regular payments than one large balance that is near the credit limit.

If you have unused accounts, you can transfer part of the high balances to prevent the credit card company from closing the unused account. Closing accounts reduces your overall available credit and may lower your credit score. FICO 08 is designed to reward responsible use of a variety of credit accounts while imposing lower scores for nonpayment of large accounts.

One item of good news for consumers is that collection accounts that are less than $100 will no longer have a big impact on credit scores. FICO 08 will place little emphasis on these accounts, especially if larger accounts are in good standing. Also noteworthy, the FICO 08 will judge the occasional late payment or credit slipup less harshly if the other accounts are kept current.

The new scoring model is designed to make high-risk borrowers with numerous credit infractions easy to identify. For some, the FICO 08 will be tougher; lowering credit scores and making it more difficult to establish credit. However; if you are a responsible consumer, pay your bills on time, don't overextend your line of credit, and maintain a good credit history; you will likely see your credit score go up when FICO 08 is implemented.

By Beth Fields
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