Fair Isaac, the company that is responsible for the formula behind your FICO score, has been planning an update for a long time, and it’s now being put into practice, but not without a few wrinkles.
Called “FICO 08”, the new re-tooling should provide a more accurate risk assessment for anybody with a credit history. The most alarming thing right now is that while Fair Isaac is ready to roll out the new formula, according to the Chicago Tribune only one of the three credit reporting agencies, TransUnion, is making use of the new rules. Equifax is going ahead with plans to use FICO 08, but Experian may take quite a bit of time due to pending litigation with Fair Isaac. Suffice it to say that this won’t have an overnight impact on your ability to borrow.
Eventually, though, here’s what it means:
No more piggybacking
Not too long ago companies started offering to add someone with poor credit as an authorized user on an account belonging to someone with better credit. After a while, the credit rating for the less fortunate person would improve. Under the new formula, this sort of—let’s be frank—trickery will not be rewarded. Spouses and children, however, will not be penalized in the same way.
Bad accounts under $100 are no problem
Even if it goes to a collection agency, if you foul up on an account with a balance of less than $100, it won’t heavily affect your score.
A single serious flaw won’t ruin everything
With the older system, one big problem, such as a vehicle repossession, could torpedo your entire credit score. Now, if all other accounts are in good shape, one serious issue will not matter as much. – NewsChannel5
Available credit means more
This may be a case of unfortunate timing, with Americans’ credit lines shrinking as a result of fearful banks, but your future FICO score will depend more heavily on how much available credit you have. In short: keep your accounts open, even if you’re not using them.
You’ll want multiple types of credit in your name
In order to have a high score in the future, it won’t be enough to have a department store card or three, you’ll be rewarded more for having a loan or two in the mix, as well.
Updated February 10, 2011 and originally published February 3, 2009.