CHANGES ARE COMING ON HOW YOUR CREDIT SCORES ARE CALCULATED
The
three major credit bureaus have announced plans to roll-out changes relating to
how your credit scores will be determined at various points in the year.
Here are the changes to
FICO 08 that have been announced by Fair Isaac:
- The score will be more sensitive to capacity
(i.e. the percent available to use on revolving lines-of-credit). This is
a potentially big issue as many national credit card issuers have begun to
lower limits or close accounts with little or no warning due to economic
concerns. Consumers with revolving balances or few high-credit cards will
be the most affected by this change.
- The score will react more negatively to all
types of activity if a person has limited history (e.g. only a
few open, active loan accounts). In other words, in the statistical eyes
of Fair Isaac, less debt is not necessarily a good thing. You may think
this change is ridiculous, but in a way it makes sense. In order for
statistics to more accurately predict your credit future it is necessary
to have more than a few accounts.
- FICO 08 will ignore collection accounts where
the original debt was less than $100. In the past, small
collections amounts have had a significant negative effect on scores.
- Fair Isaac states that the new version will be
less punishing to those who have had one serious credit setback,
such as a charge-off or repossession. All other active loan accounts must
be in good standing. Therefore, an isolated offense will not hurt a score
as much for an otherwise good credit user as it will for the serial
credit offender.
- A practice called "piggy-backing", where
people with poor credit scores "rented" the good credit card
history of others by becoming authorized users, has increased focus on
score fraud.
Now, FICO
08 will factor in authorized-user accounts "while materially reducing
potential impacts to the score." Fair Isaac has not stated how
this will be done, one potential way is that the new score will count a limited
number of authorized-user accounts and ignore the rest.
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