Your FICO score is the key factor in whether a company will extend you credit, whether you’re applying for a credit card at your local department store or applying for a mortgage for a new house. There are entire books on how to improve your FICO score and complex strategies for managing it. All that means that even a small change in how the Fair Isaac Corporation (the company responsible for FICO scores) calculates your score can be a big deal. The fact of the matter is that Fair Isaac is planning some big changes for 2009.
Starting at the beginning of the year, FICO scores will be calculated based on a new formula. The change is partly based on the increased abilities of technology meant for tracking consumer spending, as well as the fact that more consumers have credit available to them than when the FICO score was created. Fair Isaac Corporation will use the new formula to better describe and rank credit problems. In tests, the new FICO scoring system was able to predict defaults 5 to 15 percent better than the older model.
There will be several key changes that are likely to change your credit score. For one thing, the new formula offers a little more forgiveness for someone who has only one missed payment, as long as it’s isolated. In the past, a FICO score focused on the number of accounts a person had open and the amount of credit already available to them. The new formula will focus more on the balances actually carried on a consumer’s accounts.
One key technique for improving a credit score will go out the window with the new FICO score: piggybacking, or allowing someone with lower credit to be added to an account in order to improve their credit, will be harder to do. Typically used by parents who add their children to an account in order to jump start their credit history, the practice has been heavily abused in recent years by individuals with high credit scores selling their names. The reduced benefit to authorized users of accounts will cause some problems, according to Kiplinger: “…many of those authorized users are women. Many of them rely on their husbands’ FICO scores, and it will now take longer for those women to build up their own credit scores.”
Equifax and TransUnion will be switching over to the new system over the course of 2009. There’s no word yet on whether Experian will be making the switch soon.
In part, Fair Isaac’s change is in response to the current economic situation: lenders were unsure of the reliability of credit scoring models. That, combined, with their own economic issues, caused lenders to severely limit the credit they’re willing to offer. There is some hope that with a more reliable method of predicting defaults, lenders will increase the credit they’re willing to offer.
The FICO reconfiguration is a case of good news, bad news. For some consumers, the new formula will spit out a higher credit score. For many others, it’ll offer a lower score. But, either way, credit will be at least a little easier to get than it has been of late.
