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Determine your Fico

New FICO Changes You Need To Know
George Boelcke FCI

Recently, Fair Isaac, the developer of the FICO score that every lender uses to rule your financial life, has undergone some changes. FICO has be tweaking and fine-tuning their super-secret formula of all your credit bureau information used in calculating your score.

Exact information, and a lot of details, are never going to come be released in order to protect the formula, but it will impact every person with a credit file. After all, almost every lender uses the score, along with landlords, employers and insurance companies, not only for a yes or no decision, but also to set your rates!

The new formula separates all files into 12 different categories. Eight of these broad sorting categories are for "good" credit files, and four are for "bad" credit files. Since there used to be two "bad" segments, that's quite a jump in the percentage of negative files over the old system.

Here are some of the areas and how they'll impact your score:

Authorized user credit cards: If you have a credit card in someone else's name, but you are an authorized user, the credit rating benefit will no longer report on your file. Lenders made a huge stink, and largely for good reason, that these reporting's were being abused. In fact, there were companies "renting" out good credit ratings by matching someone with a bad credit score with someone who allowed that person to just become an authorized user "on paper."

So to continue getting the benefit of the credit rating, while piggybacking off someone else's file, you'll now need to become an actual supplemental card holder. In other words, your name needs to be on the legal documents. But industry insiders estimate this may affect upwards of 30 percent of credit files, and that could be as high as 60 million people who will now lose out on their legitimate credit rating boost.

One late payment won't kill your credit score anymore. The rough formula used to be that someone with a great track record paying one item, one month late, had their score drop around 100 points. That will no longer be as punitive as the score looks more at the big picture, and becomes a little more forgiving of a one-time hiccup. That change is certainly welcome and common sense. After all, being in arrears on one thing for some reason or another is not an indicator that your whole credit world is about to end.

But: If there's a trend of arrears, the score will now hit you harder, which is fair enough.

90-day arrears: There will now be a better sorting of what type of credit goes three or more months in arrears. After all, there's a difference between a $200 department store card and a $10,000 loan.

New applications for credit: Your credit score won't be as sensitive, or negative, on new credit applications. No matter what, you should still stay away from department store cards for lots of other reasons.

Keep your balances down: Your score will now be much more sensitive to the balances you carry. That's not unreasonable, and common sense. Bigger balances make for higher payments, which is one way to get into real financial trouble.

Active use of credit cards now matters: If you have a credit card that you haven't used for a long time, take it out and give it a small test drive. A card you haven't used, but is still active, keeps reporting the limit, and rating history, and adds (in a good way) to your percentage of credit used.

But the FICO score is now more aware that the card has been at a zero balance for some time and starts to lower the weighting (importance) of the impact from that card on your score. So keeping it active is now another step beyond just leaving it in a drawer. It's worthwhile to trigger a charge every couple of months to prevent your FICO from thinking the card has gone to sleep forever.

Your mix of credit: Remember the old saying, "all your eggs in one basket?" Well, the credit score now knows that saying, too. There is a different scoring on the mix of your total credit. In other words, is there nothing but credit cards, which is higher risk, higher rates and all unsecured? Or is it well balanced between some credit cards, installment loans and the likes.

But who is Fair Isaac really doing this for? They're selling lenders on the fact that these changes, tune-ups, upgrades, or whatever you want to call them are designed for lenders to reduce their default rates by five to 15 percent.

Sorry, you thought it was to help consumer? Not quite, because the big buyers of credit scores are lenders, and they're the ones who need to be satisfied that the scores they rely on accurately predict the future risks in their portfolios.

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