Credit Score - FICO ’08 is coming!

The way consumer credit scores are calculated will be changing soon.  In early spring, The Fair Isaac Corp. – creator of the FICO score – will be unveiling a new scoring model for determining credit scores, dubbed FICO 08.  While the Fair Isaac Corp. is keeping their methodology for determining credit scores under wraps, Better Business Bureau (BBB) is offering a few details and advising consumers on how FICO 08 could affect them in ways they may not have imagined.

FICO scores – which range from 300 to 850, with higher scores being better – are based on consumers’ credit histories and reveal their risk for defaulting on loans.  A good credit score is anything higher than 700.  Average FICO scores for U.S. consumers are around 690.  More than 90 percent of the 100 largest banks rely on FICO scores in determining both who they will lend to, and at what rate.

“Not only can a low FICO score keep consumers from getting loans to buy a house or car, but many landlords, utilities services, and employers rely on the score as well,” said Brodie White, President, BBB Southeast Florida and the Caribbean.  “This means that a bad score can keep people from getting a good rate on insurance, an apartment, or even a job.”

The Fair Isaac Corp. explains that the new method is more forgiving of minor slip-ups and will more accurately predict a borrower’s risk of defaulting on loans.  The good news is that the Fair Isaac Corp. predicts that more people will see their score increase than decrease.  FICO 08 will still take into consideration the same factors of a person’s financial history including indebtedness, length of credit history and number of open lines of credit.  The difference with FICO 08 is the weight these factors will carry.  The Fair Isaac Corp. explains that two people with the same score today could have completely divergent scores under FICO 08.

Your FICO Score Might Go Up If…
You maintain various lines of credit, such as credit cards, a car loan, and a home loan, because it demonstrates your ability to successfully manage different types of loans.  You will also be penalized less if you are delinquent in one account, but are in good standing in others.

Your FICO Score Might Go Down If…
You have many delinquent accounts.  While a delinquent account has always had a negative effect on your credit score, persons with more than one delinquent account may see their score slip even more.

No More Piggybacking
BBB notes that piggybacking has become a popular way for people with no credit or bad credit to increase their credit score.  Piggybacking involves being added as an authorized user to an account maintained by a person with good credit.  Often, parents will make their child a joint user of their credit card which helps the child build a credit history.

BBB has been alerting people that the flip-side of piggybacking is that credit repair services have cropped up that allow and encourage people to essentially “sell” their good credit to people with poor credit by making them authorized users on their accounts.  In order to discourage this practice, when determining credit scores, FICO 08 will not consider accounts where the consumer is only an authorized user.  Parents can still make their child an authorized user of a credit card, but the child’s own FICO score will not be affected. 

The BBB encourages consumers to request a free credit report once every 12 months, and people can do so at: www.annualcreditreport.com.  Consumers can get a free report from each of the nationwide consumer credit reporting companies: Equifax, Experian, and TransUnion.  Obtaining an actual credit score may cost consumers a few dollars, but for those who don’t know or are concerned about their credit score, the cost is minimal compared to the cost of not getting a loan, paying higher interest rates, or not being considered for a new job.*

For more information on being a responsible borrower, and for reliable advice on how to devise a spending plan visit www.anewhorizon.org or call A New Horizon, Credit Counseling Services, Inc. at 1-800-556-1548.

Improving your FICO® credit score

It’s important to note that raising your FICO credit score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time. See how much money you can save by just following these tips and raising your credit score.

Payment History Tips

• Pay your bills on time.
  Delinquent payments and collections can have a major negative impact on your FICO score.
• If you have missed payments, get current and stay current.
  The longer you pay your bills on time, the better your credit score.
• Be aware that paying off a collection account will not remove it from your credit report.
  It will stay on your report for seven years.
• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
  This won't improve your credit score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

 
Amounts Owed Tips

• Keep balances low on credit cards and other “revolving credit”.
  High outstanding debt can affect a credit score.
• Pay off debt rather than moving it around.
  The most effective way to improve your credit score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
• Don't close unused credit cards as a short-term strategy to raise your score.
• Don't open a number of new credit cards that you don't need, just to increase your available credit.
  This approach could backfire and actually lower your credit score.

Length of Credit History Tips

• If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.
  New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

• Do your rate shopping for a given loan within a focused period of time.
  FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
• Re-establish your credit history if you have had problems.
  Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
• It is OK to request and check your own credit report.
  This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

• Apply for and open new credit accounts only as needed.
  Don't open accounts just to have a better credit mix - it probably won't raise your credit score.
• Have credit cards - but manage them responsibly.
  In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
• Closing an account doesn't make it go away.
  A closed account will still show up on your credit report, and may be considered by the score.**