New FICO score formula
If you’ve ever applied for a loan and had your application rejected, you may have been surprised to discover that your credit rating wasn’t as good as you thought it was. Lenders rely upon credit bureaus to supply valuable information to help determine the credit worthiness of loan applicants. But one of the never-ending challenges these bureaus face is to make sure the information they provide is as reliable as possible. That’s why Fair Isaac Corporation, the supplier of the most widely used FICO credit score, has released a new and improved scoring model.
Called FICO 08, the new score will retain the same scoring range as current FICO scores, from 300 to 850, but is expected to provide a more fair representation of a person’s credit history.
It will do this, in part, by deducting fewer points than the current formula for occasional credit transgressions and deducting more from those who are repeatedly late on their bills. And, most importantly, it will put a stop to the practice of someone with poor credit boosting his or her score by hitching onto someone else’s good credit rating. This practice, also known as “piggybacking” onto another person’s score, causes a problem for lenders because it misrepresents someone’s true creditworthiness.
Concerns about the new formula
Some critics have concerns that preventing all authorized users listed on credit cards from benefiting from obtaining a shared credit history, is going to hurt those who need it most. For example, parents will no longer be able to boost their kids’ scores under the new formula. Whereas the existing FICO score enables parents to add a son or daughter onto their credit card as an authorized user to help them obtain a good rate on a loan, this will no longer be possible with FICO 08. However, proponents of the new system say the benefits of blocking fraudulent users from this practice far outweigh such downsides.
Building good credit under the new formula
To establish good credit in the future if FICO 08 becomes the new scoring standard, all consumers will simply have to follow the tried-and-true practice of building their own credit rating from the ground up. This means applying for such easy-to-obtain credit cards as store cards and gas cards and gradually building up a positive credit history by making regular payments in full and on time.
New score to be available this spring
The new score will be available to lenders this spring through TransUnion, the first of the three credit bureaus to offer the new system. However, according to a company spokesman, banks and other lenders typically spend a year to 18 months conducting their own internal testing before they adopt any new credit scoring system. It’s therefore expected to be a while before FICO 08 will have an impact on consumers. In the meantime, as always, it’s important to stay on top of your credit rating so you can catch and correct any inaccuracies.
Start today, by requesting your free online credit report and score from LendingTree.
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