New Rules For Credit Scores: How Will FICO 08 Affect Your Credit?

Need to buy a car or apply for a new credit card? How will the new methods of calculating FICO scores affect your ability to obtain credit? Indeed, those pesky little credit scores serve as a reminder that all of our past credit card transgressions are recorded and will haunt us for a number of years. Take a look at this article to find answers to your credit report questions.

History Of The FICO Scoring Method

FICO scores (or credit scores) were developed by the Fair Isaac Corporation to give lenders an effective way to measure the creditworthiness of an individual. Essentially, the credit score is made up of two elements: the borrower’s ability to repay the loan and the borrower’s willingness to repay the loan. The range of the FICO is from 300 to 850. A score of 700 is considered excellent. The average FICO score currently is 690 and falling.

FICO 08: The New Method Of Calculating Creditworthiness

Early this year, FICO introduced the FICO 08. So, far only TransUnion has begun using it; but, it is expected to become industry standard over the next eighteen months. It will change the way that creditors evaluate a borrower’s creditworthiness.

FICO 08: The Important Changes To Credit Scoring

Credit utilization is now more important

This is a measure of how much a credit card holder accesses his or her credit as compared to his total amount of credit. The traditional ratio was 30% of the old FICO score. Under FICO 08, people with high credit card debt in relation to their available credit are riskier than before. Consumers with balances close to their credit limit are likely to see their scores drop lower with FICO 08. Also, consumers with too few open accounts or people who close accounts (lowering total credit available) may see lower scores.

The Piggyback Ride Is Over

Credit card piggybacking is a credit building tool where a person will pay a fee to get listed as an authorized user on the credit card of someone with good credit history. While the “authorized user” doesn’t actually get to use the card, he gets the benefit of the credit history which will be found on his credit report and thereby increase his credit score.

This practice has become so popular that an entire niche industry has been built to match piggy back users with cardholders who are willing to sign them up as an authorized user.

While FICO 08 penalizes piggybacking, people who add a legitimate authorized user (husband, wife or child) will not be affected.

Go And Sin No More

Those of us who have been adversely affected because we failed to return a movie on time can now relax. Third-party collections under $100 will no longer have a significant impact on a consumer’s score. FICO 08 bypasses collections or public records with amounts that originally were less than $100. If the original amount was over $100 but has been paid down to less than $100, it still counts. If it was even a small amount from a credit card company, it still counts.

Miscellaneous Weight Changes

FICO 08 changes the factors considered in the current FICO score, including the length of credit history and the number of open lines of credit.

The FICO 08 system will have dramatic effects on current scores. In fact, it is predicted that several people with identical scores today will have significantly different credit scores under FICO 08. So, it pays to pay attention. Find out how FICO 08 will affect you before you need additional credit.

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