FICO Introduces New Credit Scoring System
by Bill Hardekopf
In the world of finance, your most important score is your credit score, and one of the most widely used scoring models, FICO, is making changes to provide lenders a more accurate evaluation system.
Fair Isaac's new scoring system, FICO 08, helps lenders assess what kind of credit risk you are. This determines how much interest you pay when you take out any kind of loan. The new system has the same scoring range, 300-850, but it is expected to increase the accuracy of lending decisions by 5% to 15%.
According to FICO, the former credit score evaluates consumers based on the worst performance on any credit obligation. FICO 08 will evaluate consumers based on the degree of negative performance across all credit obligations.
This will be helpful for creditors. The more accurately they can predict the consumer's borrowing and payment behavior, the more accurately they can control the terms and amount of the loan and reduce their lending risk. This new system will no longer harshly penalize responsible borrowers who have had one or two small issues, like late payments, in their recent credit history.
Another improvement for cardholders is a minimized risk of minor infractions. The FICO 08 score will no longer evaluate small amount collection agency accounts, such as judgments and tax liens (under $100). Consumers will not be penalized for minor infractions like parking tickets and library fines.
To better predict the risk of default, FICO 08 will increase the scoring model segments from 10 to 16. More specific segmentation allows for a more accurate assessment of risk for those with credit problems.
The company is also creating solutions to resolve some of the issues from the manipulation of authorized user accounts, commonly know as "piggybacking." It recently considered banning piggybacking due to abuse by credit repair scams that created a loss for lenders. Fair Isaac says that its analysts have developed patent-pending technology that includes authorized user data in the calculation of scores, while reducing the potential impact from tampering. This means they will continue to account for authorized users, such as spouses and children, in score calculation. Piggybacking gives a person with limited credit history the benefit of being added to the account of a borrower with a more established credit history.
Transunion is the first agency to offer the score. Equifax is expected to offer it by the second quarter 2009.
Bill Hardekopf is the CEO of LowCards.com, a site dedicated to simplifying the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.
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