FICO 08–New Rules Affect Consumers
The credit scoring system is being tweaked again as Fair Isaac Corporation, developer of the FICO credit score rolls out a new model called FICO 08.
A demand by users for a better way of analyzing risk in the wake of both rising mortgage defaults and consumer credit delinquencies has pushed FICO into speeding up the release, originally announced in June, 2007. It is expected that FICO 08 will begin to roll out by late spring.
FICO remains the product used by most lenders not only to grant credit but to set interest rates and other loan terms. FICO scores are also factored into credit decisions by insurance underwriters, cell phone, and utility companies and are sometimes used by employers to evaluate prospective employees.
FICO 08 will supposedly go easier on consumers who make the occasional slip while coming down harder on those with multiple offenses. For example, it will give a slightly higher score than previously to a borrower who is late on one obligation but current on multiple other accounts. Those with several delinquent accounts could find their credit score has dropped.
Scores will still range from 300 to 850 and will take into account the same factors as the old version such as timely payment history, length of credit history, amount of debt, ratio of debt to available credit, type of debt and any excessive amount of recent new credit. There will also be a premium placed on the debt mix; that is a consumer with revolving and installment credit will fare better than one with nothing but revolving credit card debt.
Among the big changes FICO is in the area of evaluating "authorized users." An authorized user is one who is not responsible for paying a credit card, but that card's history is reported on the user's credit as well as on the owner's credit, commonly called "piggy-backing." Parents have for years made children authorized users of their cards in order to help them build credit and many spouses derive all of their credit histories from being authorized users of their husband's or wife's card.
FICO 08 will eliminate any impact of being an authorized user. This will not only affect the authorized user but also the college student hoping to build his credit on the foundation of his parents' credit.
Contributing Source-Mortgage News Daily
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