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Bob Ferguson

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.


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