Recent Changes in Credit Scoring and Reporting and How They Affect You - FICO 08

While the roots of the modern credit report can be traced all the way back to 1898, the numerical credit score wasn’t devised until the 1950s and didn’t become a major part of the American financial system until the last twenty years. In 1956, Bill Fair and Earl Isaac devised analytical tools that attempted to quantify the risk of loaning an individual money and launched a company based on this scoring system. Their company was called Fair Isaac & Co., better known by the acronym FICO. After several decades of success in Europe, FICO’s system caught on in the United States beginning with Equifax in 1989 and continuing with the other two major credit bureaus, Experian and TransUnion, in 1991. Since then, the now-familiar three digit score from 300 to 850 has become an integral part of the American credit system.

The many factors that go into determining a credit score can seem complicated and daunting, and it’s taken a while for most consumers to get up to speed about how their use of credit affects this score. But just when you thought the credit score reporting process couldn’t get more confusing for consumers, some major changes have taken place in the last year with the rollout of the new FICO score model known as FICO 08.

I’ve always encouraged people to be proactive in addressing and fixing any credit challenges they may have-and that still applies. However, it’s more important than ever before to take a hands-on approach to your credit, and understanding how recent changes may affect your credit scores is a key part of being proactive.

FICO 08 - The Algorithm Has Changed

Beginning last year, Fair Isaac & Co. implemented changes in how your FICO score is computed, calling the new system FICO 08. The model replaces the existing FICO model, which has remained relatively unchanged since the 1980s.

Per Fair Isaac, here are the key changes in the new model:

• Do Authorized User Accounts Still Work? One of the credit-repair tricks that became popular in recent years was paying thousands of dollars to be listed as an “authorized user” on the account of someone with good credit (usually a stranger), thereby improving your FICO scores enough to get into that home or auto loan immediately. That stops with FICO 08, and rightfully so - because this practice was an obvious form of fraud.

Here’s the good news-the new model will still allow legitimate authorized users such as a spouse and/or family member.  And I can tell you confidently that this credit building technique still works for spouses and children who have the same last name as the credit card owner.  There have been two cases in the last 60 days where I have seen my clients’ credit scores jump 50-60 points after being added to their spouse’s credit card account.

As a true consumer advocate, my advice is to build your own credit if possible because that gives you power and control, but as a last resort this option will help. To maximize the benefit of this option, you should make sure that the account you are being added to belongs to someone you trust, has NO negative history reporting at all, has and keeps a balance under 30% of the limit and is at least 2-3 years old.  Click here to read more about adding credit.

• Having just one big black mark on your credit, like a repossession, will matter less than it used to if your report demonstrates responsibility overall.

• Collection accounts with balances less than $100 will not impact the credit score any longer.

• Maxing out those credit cards will drag your score down even more than it used to! FICO 08 increases the emphasis on having available credit.

• Having a mix of credit is also more important in FICO 08. This means you MUST have at least 1-2 active major credit card accounts.

As a credit score expert, the changes that I have seen in hundreds of credit reports are NOT representative of what consumers were led to believe a year ago when the new model was introduced. FICO said that the new model would have less impact on credit scores under certain circumstances, however, in my experience, the new model appears to be producing lower scores under almost every circumstance.  Especially when it comes to credit card balances and late pays.   So if you are one of those people who are out there wondering why your credit scores have dropped in the past few months-even though nothing has changed, this could be why.

So what can you do?

1. Maximize What You Have.  The most effective way to improve your credit score is by ensuring the information used to generate the score is accurate. Click here to download my Special Report, Save Your Credit-Save Your Life: A 10-Step Take Action Plan to Improve, Protect and Maintain Strong Credit Reports & Scores.  You may also want to consider purchasing a copy of my book, The Big Score - Getting It & Keeping, which is a comprehensive How-To Guide on getting and maintaining strong credit reports and credit scores.
2. Keep Credit Card Balances As Low As Possible.  Carrying balances over 50% of your credit card limits (PER CARD) was always something to avoid, but it can hurt you even more under the new FICO 08 model. Anything over 50% will cost you points on your credit score, and anything between 30% and 49% means you’re just treading water. To improve your credit, you need to carry a balance under 30%, on your credit card statement. If-in an emergency-you must charge something that puts you over the 30% or 50% mark, if possible, rush home and pay the balance down immediately!Other basic strategies still apply - don’t ever go over your credit card limit, stay clear of the two extremes of closing accounts on the one hand-and opening accounts you don’t need on the other. And make sure that all positive accounts and credit card limits are being reported to the three major credit bureaus, Equifax, Experian and TransUnion.
3. Pay Your Bills On Time.  There are TWO important DON’Ts when it comes to late pays:
   • DON’T underestimate the affect that late pays have on your credit.
   • DON’T overestimate the kindness of creditors to remove late pays just because you have a good payment history with them.

One 30-day late can cost you 50-80 points immediately.  Trust me on this-late pays are the most difficult derogatories to have removed from your credit reports and they take at least 2 years to start significantly aging out.

The easiest way to make sure you’re on time is to sign up for automatic withdrawal, if it’s available. If that’s not possible, then try to pay your bills as soon as you receive them. If you don’t have the cash flow to do this, at the very least be sure to mail your payments 7-10 days before the due date (or pay online 3-5 days before the due date) to ensure your payments are received and processed by the time they’re due. You can also consider working with your creditors to change your monthly due dates to better fit within your budget.

In Conclusion

I want to once again stress the importance of always being proactive. Regardless of these changes and any others that may come along in the future, the primary responsibility for your credit rests with the same person it always has: you! If you continue to follow the basics of money management that have been applicable for years, and continue to do everything you can to maintain strong credit scores, then you will be in a strong place financially no matter how the credit scoring system changes.

Getting and Maintaining Strong Credit Scores

• My Free Special Report, Save Your Credit - Save Your Life is a great place to start! Click here to learn more.
• My Book, The Big Score - Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.

If you like this information that you read on this site, you may want to consider taking your expertise to the next level. Linda's book, "The Big Score, Getting It & Keeping It" is a comprehensive How-To manual on how to Get and Keep the strongest credit reports and scores. [Click here]

Tagged as: 30-day late, Algorithm, authorized user, credit expert, credit score, credit score expert, FICO 08, Mix of Credit, Scoring Model