New Credit Scoring Model

New Credit Scoring Model Set for Release in 2009- Finally!

January 6th, 2009 ·

FICO 08 was initially planned for roll-out at the latter part of 2008. Besieged with lawsuits between its creator, Fair Isaac, and the three largest credit bureaus, the kickoff for the much anticipated new system is now slated for early 2009. For consumers, this could mean a minor boost– or bust– for individual credit scores.

In an attempt to fine-tune credit risk evaluation in these challenging times that creditors– and consumers- are facing today, the developer of FICO scores has made the most significant modification to it’s mathematical credit score model since it’s introduction in 1989. The Fair Issac company estimates that 40% to 50% of consumers may see a 20+ point variation in their score due to the new algorithm- and not necessarily in the positive direction.

The premise behind the revised scoring system is to reduce risk of defaults for creditors through improvement of the accuracy of predictability. Given that delinquencies or at their highest level since the 1992, the industry was searching for ways to improve confidence in credit scoring models and their results. FICO 08 is their proposed solution, and Fair Isaac estimates that predictability of default will be improved by up to 15%.

Although FICO 08 is geared toward helping creditors primarily, there are some definite improvements for consumers as well, including:

Authorized Users information still considered. Fair Isaac initially said FICO 08 would no longer consider “authorized users” in their formula, a practice commonly known as “piggybacking”. After a rather large consumer outcry and potential credit fairness issues, Fair Isaac backed off and decided some authorized-user information would be included.

Small Collection Accounts Disregarded. Accounts with debt less than $100 (must be original amount) are ignored. This is a big plus for individuals who simply had a bad day and forgot to pay off a parking ticket or similar minor debt, but otherwise have good payment history.

Considers Single Credit Mishaps. If you only have one major negative issue on your credit report, as opposed to a string of items major and minor, the new model apparently will be more forgiving to these individuals.

Amount of Available Credit You Use Is Weighted More Heavily. The changes that are likely to “bite” you include the amount of available credit you are using. With the clamp-down in maximum credit limits that many  card issuers are implementing carte-blanche to consumers, you could see your scores plunge, regardless of whether you carry a balance.

Having Fewer Open, Active Accounts Hurts Your Score More Another potential affect to consumers is that the new scoring formula responds more negatively if card users have fewer open, active accounts. Because more credit card issuers are shutting down unused and unprofitable accounts, that boosts the chances of damage to your scores.