The Fair Isaac Corporation has recently released the latest version of its widely used FICO score, called FICO 08. TransUnion has already begun using the new formula, while Equifax plans to start using it in the spring. Experian hasn’t announced when it will join the bandwagon, but it probably won’t be far behind.
But, what does this new formula mean to your credit score?
The Downsides to the New FICO Scoring System
Unfortunately, there are several downsides to the new FICO scoring system that could potentially hurt your score.
First, the new formula will be much less forgiving about your debt to credit ratio. Therefore, if you are carrying a considerable amount of debt when compared to your available credit, you will likely see your credit score drop quite a bit. Since the unstable economy has caused many credit card companies to reduce the credit limits of their customers, this change can have an even greater impact on credit scores than was previously anticipated.
The new scoring system will also look less favorably on consumers who have only a few active accounts. Again, since the economy has lead many credit card companies to shut down accounts, this change may affect a greater number of consumers than it probably should.
The Benefits of the New FICO Scoring System
Despite the drawbacks associated with the new FICO scoring system, there are certainly some benefits as well.
For example, debts of less than $100 that have been sent to collections will not have a negative impact on your score. Therefore, if you had a few unpaid parking tickets, library fines, or small medical bills that you forgot about and left unpaid, you will no longer have to worry about it hurting your credit score.
The new formula will also be less punishing toward those who have had their home repossessed or who have had to make a charge-off, so long as their other accounts remain in good standing.
Also, consumers won’t be penalized as heavily for one-time late payments. On the other hand, those who are repeatedly late on payments will see harder hits to their credit score. The change makes sense – a borrower who forgets a payment one month shouldn’t have the same credit score hit as someone who deliberately misses payments.
Better Scores for the Hard-to-Score
The new score takes a deeper look at two segments of borrowers who typically have low scores – those who are new to credit and those without many accounts in their credit files. This is an important move for new borrowers who often have trouble building a credit score because they’re unable to get access to credit.
Changes to Authorized User Accounts
When development on FICO 08 was first announced, Fair Isaac said it would discount authorized user accounts. But, they ultimately decided to keep the accounts, but provide a way to let lenders know if there’s abuse. For example, some borrowers game the system and fake higher credit scores by paying to have themselves added as authorized users to accounts with good credit histories. If FICO 08 had completely ignored authorized user accounts, then legitimate authorized users—like children and spouses—would have been negatively affected. Fortunately, the new score will still allow those “real” authorized users to see a boost.
Can You See Your New FICO?
Right now, FICO 08 is only available to lenders and only through TransUnion. Experian is reported to begin offering the new score by June and Equifax hasn’t stated whether it will offer the new model or not.
Consumers won’t be able to check their FICO 08 scores yet. There hasn’t been an announcement on when (or if) FICO 08 will be available to consumers. So if you check your FICO score before shopping for a loan or applying for a credit card, remember that it is not your FICO 08, which your lender may be using. Also remember that FICO is not the only game in town; there are thousands of scoring models out there that lenders use.