Fair Isaac claims its new credit scoring formula will be able to signal more accurately borrowers who are likely to default or get behind on payments. The new formula, called FICO 08, will be less stringent on consumers who rarely have late payments, but will more strict on consumers who are repeatedly late. Lenders expect this new scoring system to reduce defaults by consumers from 5% to 15%
A consumers FICO score, is a tool estimated to be utilized by a significantly large portion of the banking industry. Banks and financial institutions use them to analyze if a consumer is worthy of receiving lines of credit, home loans, auto loans, opening a checking account, insurance, mobile phone, getting hired, turning on utilities and more.
The new FICO 08 will not look or feel new to either consumers or creditors. The scores will still range from 300 to 850. The new system will continue to look at the same determining factors, including payment histories, large or small debts, length of credit histories, quantity of credit inquiries, and the credit type, to determine consumers scores.
The difference in the new FICO 08 system is it will work harder to separate the creditors who are a good risk from the creditors who looks like a bad risk. It targets those borrowers with sub-prime credit; people who are just starting to get credit; and consumers who are inquiring for new credit.
A benefit is that consumers who are categorized as less likely to default on loans or "low risk" will receive better scoring using the new FICO system, and people who have had past or recent credit problems will score lower than today's system. The consumers who are in the center with less-risky profiles will begin to see better offers from lenders.
Normally, most credit scoring formulas categorized people with sub-prime credit into one large bowl. According to Fair Isaac's new model, a borrower who is behind on payments on one account along with having other credit accounts in good standing will receive a higher score than before. On the other hand, an individual's score could drop significantly more if they have numerous delinquent accounts.
Despite the new scoring model, people will still have to confirm the information in their credit reports to be accurate, error-free. If there's inaccuracies, or unauthorized use, you may be a victim of the ever rising problem called identity theft. To combat identity theft, there is a new company called LifeLock that backs their product with a $1 million dollar guarantee that your identity will not be stolen under their watch. Their boss is even so bold as to give out their social security number without any fear. For normal check-up on your credit, you can contact the credit bureaus directly, Experian,TransUnion, and Equifax., to request a credit report copy. If there are any errors, misinformation, or ID theft be sure to contact the credit bureaus or the financial creditors.
FICO 08 is also targeting the growing half-truth business of permitting consumers to raise their credit scores by becoming an authorized user on another person's good credit account. Recently, and even discussed on popular radio personal finance shows, credit repair companies are selling people with bad credit a chance to boost their scores by becoming authorized users on accounts held by strangers with better credit. The new FICO 08 will not award higher scores on credit card accounts for authorized users. In addition, it hurts the primary user who opened the account. This even applies to a child or a spouse. Now, you must stand on your own to raise your credit score which can certainly be done if you follow the principles.
Frank Collins is knowledegable in the area of Mortgage Loans and Improving Credit Scores.
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