Just about the time when everyone was on the same page with the old FICO scoring system, Fair Isaac's Corp. is making some needed changes in the the way the formulas will be calculated. A glimpse of the new model will be available in Sept 2007. This change will only affect one reporting agency in 2007 and the others will implement it in 2008. Fair Isaacs says the new system is not that much different. The major change in the new system is in the way it looks at those that receive credit points who are authorized users on someone else's credit card.
People with little credit history or with poor credit will likely see their scores change significantly when they close this loophole. It will illuminate on the scores of millions of authorized users and their scores will be affected, either up or down as the system is implemented.
This change will mostly effect the younger adults that are trying to establish credit by attaching themselves to their parents credit cards. They ride the coat tails of their established parents credit to be able to circumvent the time required to establish for themselves. Married women who use the family credit cards, but have little credit on their own will also be affected.
Fair Isaac is closing this loophole because the lending industry has complained about abuses and said that the loophole was distorting the borrowers' true credit risk.
As a suggestion for those who become authorized users to help build their credit, they might consider switching to a joint account. That would allow the joint member to continue reaping the benefits of the primary cardholder's strong credit history. However it must be understood that doing so also poses some risks for the primary holder of the credit card. If the authorized user abuses the card it will affect the primary card holder credit as well. The primary cardholder can expect to see a change in their respective credit score.
As I was researching the available information for this post, it occurred to me that there is really no clear way for one to gather the information with any assurance that you have a handle on how their specific credit score was composed. Perhaps the new scoring system will take this into account and help create a more understandable way of how the score was composed.
MyFICO.com does give general guidelines on how the score is determined. Let me correct that, how your 3 scores are determined. Most people assume they have one FICO score when in fact there are 3. Each of the reporting agencies determines their own score based on what they have in their reports for the borrower seeking credit. So depending which one of the 3 reporting agencies (Experian,Equifax,and Trans-Union) individual score is used, will vary. Perhaps not by large numbers but they will each have a different score.
On the site MyFICO.com these are the general guidelines of the composition of the score.
35% of the score is determined by Payment History
30 % on Utilization ( by what percentage of your available credit are you using )
15% by your established Credit History
10% of the score based on Inquires
10% on your Mix of Credit ( installment credit, credit cards, mortgage, etc.)
When a lender then quotes you your FICO Score, they are usually quoting your average score by adding up all three and taking the average.
If you were buying car for instance, the dealership may only use one credit reporting service. Your score might be very different than if you were applying for a loan to purchase property. The Mortgage Brokers will most always need to factor in as much information as possible for the underwriters of the loan to consider when determining loan approval.
In adjusting the FICO scoring formula, Fair Isaccs who created and owns the formula, says that adjusting this formula is needed to protect the continued reliability and predictive power of the FICO Scores. Dr. Mark Green , the CEO of Fair Isaccs, said about the upcoming formula change, " We will do whatever it takes to protect the reliability and accuracy of FICO credit scores for lenders, and to ensure lenders can continue to use FICO scores with confidence when making their most important customer decisions". He added " We will continue working with lenders regulators and others in the credit reporting industry to end deceptive practices that misrepresent consumer credit histories for profit".
The new system will take some getting used to but in the longer run it may create a more reliable and accountable system. In the shorter run, a lot of people's scores will be changed and that may create some confusion and concerns for the borrowers.
The exact details of the new system will always be safeguarded by Fair Isaacs Corporation prevent competitors and critics from cracking their trusted system.