Credit scores have and always been a very important part to our life. Like it or not this three digit score decides many things for you such as (but not limited to):
- Employment Opportunities
- Insurance Costs
- Interest Rates You Pay
- Being Approved For a Loan or Credit Cards
- Renting an Apartment
- Opening a Checking/Savings Account
It's extremely important you know the changes that are currently underway on the current credit scoring model.
First off, the very brief background information about credit scores. Credit scoring models have been designed by Fair Isaac. Currently most credit bureaus subscribe to their credit scoring algorithms (fancy word for the way the calculate that three digit score. Fair Isaac says that their new scoring model will do a better job of predicting the likelihood of a borrower defaulting on a loan. Fair Isaac's current system is used by 90% of the 100 largest banks. The changes in the new model will quickly affect millions of borrowers.
Now, for what we know about the new model. According to the Wall Street Journal the new FICO scoring model (known as FICO 08) will 'look and feel the same way as the old one'. Scores will still range from 300-850 and will include the same factors like the level of indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used to determine the scores.
Delinquencies are one area that FICO 08 will really be tightening up on. The new model will draw much larger distinctions for borrowers that are 90 days delinquent and they will be seen as a 'Serious Delinquency'. Under the new model, borrowers with other accounts in good standing will help compensate for the one account that is delinquent. For borrowers with multiple delinquent accounts, expect a larger hit to your credit score.
The other large change is to battle a recent 'loophole' that existed in the scoring system. Some borrowers were becoming 'authorized users' on other individual's credit cards and effectively piggybacking their credit history on those cards. Lenders quickly caught onto this on subprime borrowers, but now Fair Isaac is doing what they can to eliminate this problem. If you have an account as an 'Authorized User', your account simply won't be considered for scoring purposes. So, if you're a spouse that is an authorized user on a card, this change will hurt your credit score.
Below is an example of how these changes may affect a borrower's credit score. (Courtesy of Wall Street Journal)
The main question is when this will directly affect you. Fair Isaac has already distributed the new scoring model to Experian, they are in the process of implementing it. Trans Union says that they will have FICO 08 by the second quarter of 2008. Equifax has said they will not implement the new system until a lawsuit involving Fair Isaac is resolved (too much info for this one post, but check out the full WSJ article for more).
Yield ahead! These credit scoring models are never as transparent as we'd like them to be. I will keep you posted as we have more experience with FICO 08 in the future.
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