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New credit score formula on horizon

New credit score formula on horizon

(Credit and Money Matters) Permanent link

Your credit score helps lenders determine if you’re a good risk for a car loan, mortgage or credit card. Fair Isaac Corp., maker of the FICO score used by most banks and mortgage companies, is changing its formula in order to better predict the likelihood of a borrower defaulting on a loan, the Wall Street Journal reported last week.

The new scoring system gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan. It will give a break to consumers who have one delinquent account if they’re in good standing with other creditors. On the flip side, borrowers who use a high percentage of their available credit will be penalized to a greater degree. And the new system aims to end the practice of allowing people to improve their credit by "piggybacking" on someone else's good credit history.

FICO score rates your credit worthiness based on a score between 300 and 850  -- the higher, the better. The exact formula of the FICO and other scoring models is a trade secret. However, Fair Isaac has identified five criteria and their relative weight, reflected in this pie chart:

FICO pie chart

WSJ published this graphic showing how the changes could affect consumer credit scores:

FICO 08 chart

You can purchase your credit score from one of the three major bureaus -- Equifax, Experian and TransUnion -- when you request your free annual credit report. But you may receive a VantageScore instead of a FICO. VantageScores range from 501-990 and apply a letter grade. You earn an “A” if you score between 901-990, while a score of 600 or less receives an “F.” If you are applying for a home loan, your lender must give you your credit score for free.

Posted by AGO Blog Moderator at 12/31/2007 12:16:09 PM | 

Is there a possibility, in view of the bailout efforts for high card balances, to thave the 7 year limit altered once accounts have been paid off.
I am 59 years old and a registered counselor in the State of Washington.
I have been the vicitm of program elimination in the private non-profit sector and have suffered credit wise because of this. I have worked steadily for the past 2 years and paid off delinquent accounts but since they will remain on my credit history for 7 years repayment hasn't done much good. It would be extremely helpful if one were able to eliminate bad credit over 3 years old in order to re-establish credit standing.
Posted by: Beverly E Brown ( Email ) at 11/3/2008 8:14 AM

In accordence to the constition, it is the right of the people to abolish laws that oppress people, and that is exactly what federal allowed credit reporting agencies are doing to people of the United States.
It is up to us to abolish such laws !
Posted by: Nancy ( Email ) at 6/15/2009 6:58 PM

A problem consumers will face with the new system as well as the old system is the 30% of your score is based on amounts owed. That may include a debt ratio based on what you owe versus your total amount of available credit. Every time a creditor lowers your credit limit, as many credit card companies have done lately, your debt ratio increases making you look like a higher risk.
The bureaus don't make public all of the calculations in their algorithms, so you can't know for sure exactly how you are being rated.
Focus on paying down your credit cards and don't cancel them when you pay them off. It could cost you history score.
Posted by: no more mortgage blogger ( Email ) at 12/6/2009 7:57 PM

The bureaus are able to keep the way they calculate scores a secret. And their biggest clients are in the financial industries who charge you more money as your score goes lower. If your score goes too low, no more mortgage aproval, no auto loan, no credit cards, etc.
It also appears small business owners who use their credit often and in high amounts could suffer even though they make their payments on time. Often they use their credit to further business in different amounts as income ebbs and flows.
It does seem to be a system where it is easy to get penalized which leads to higher costs for the consumer. A new scoring model looks like it could make many scores look worse on the grading scale.
There are still a lot of inadequacies in the system. Constant pressure on your elected officilals is needed if you want to see change. Otherwise a scoring model that appears to benefit the companies that buy the scoring data and charge you more for lower scores is not going to improve.
Posted by: no more mortgage blogger ( Email ) at 12/20/2009 10:56 AM

Despite the proposed changes in the FICO '08 update, Fair Isaac announced that authorized users would continue to benefit from the practice. According to John Ulzheimer, president of educational services, "The millions and millions of consumers who would've seen their scores go down are not going to see that happen." And that's good news.
Posted by: Keenan ( Email ) at 12/7/2010 5:27 PM

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