Changes are finally coming to the "art" of credit scoring, the mathematical modeling of assigning a number score to how a Consumer uses credit. Soon, two of the three credit reporting bureaus will use a new model. Fair Isaac, the developer of FICO scores, has made the biggest change to its mathematical credit score model since it was introduced in 1989. Scores will still be on a 300- to 850-point scale. But the company estimates that 40% to 50% of borrowers' scores could go up or down by more than 20 points because of how the new model fine-tunes the variables it uses to evaluate consumers' credit use behavior.
For creditors, the new FICO score promises to reduce the risk of defaults, improving the predictability of defaults by 5% to 15%. Delinquencies are at their highest rate since 1992, when the economy was also in a recession.
Equifax and TransUnion will be the first credit reporting bureaus to roll out the changes over the next year. As credit has tightened because of the financial crisis, FICO scores are becoming increasingly important for borrowers looking to qualify for favorable terms. That puts high scorers in even a better position for pricing on loans.
Piggybacking - upping a score on someone else's back - won't be ruled out in the new FICO score. But it will make using that route to establishing credit harder and lengthier. The authorized user provision allows young adults to create a credit history by using and paying off accounts held by their parents. But it has also been subject to abuse, with high credit scorers selling their names to borrowers looking to improve scores. Fair Isaac estimates that 30% of U.S. credit card holders, or 60-75 million people, are authorized users. Fair Isaac has increased the number of groups that customers fall into from 10 to 12, taking into more account the number and magnitude of credit problems. Infrequent problem borrowers will no longer be lumped in with habitual delinquents. The new FICO model also focuses less on how many accounts a borrower has and more on the amount of balances carried.
The bottom line- know what your credit report looks like now, and work on improving any areas you can over the next 6 months. Sounds like another good New Year's resoloution to me!
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