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
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
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
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
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
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