FICO Changes Its Credit Model (FICO 08)

New help is available for consumers who are looking to re-finance their homes or secure other loans from financial institutions

The Fair Isaac Corporation, creator of the FICO score has changed its model for determining credit ratings in what is called "FICO 08."

The scores, range from 300 to 850 and indicate consumers' risk as borrowers, for defaulting on loans. The higher the score, the better. The national average FICO score is around 650.

More than 90 percent of the largest banks in the country rely on these ratings to determine both who they will lend to and at what interest rate.

Connecticut Better Business Bureau president, Paulette Scarpetti, says the changes more accurately reflect a borrower's risk of defaulting on a loan.

"As a result of the change to the FICO formula, the Fair Isaac Corporation predicts most consumers may see their credit scores increase, rather than decrease. This is of crucial importance given the current economic difficulties, as many American families struggle to stay afloat by trying to secure more credit."

The Fair Isaac Corp. explains that two people with the same credit score under the old formula may have completely different scores under FICO 08.

FICO 08 is more forgiving of minor slip-ups and designed to more accurately reflect a borrower's risk. Fair Isaac also predicts the new system will help lenders reduce default rates on consumer credit in the order of five to 15 percent.

In calculating scores, FICO 08 will continue to take into account factors such as a consumer's financial history, including debt load, length of credit history, the number of open lines of credit and how much of that credit is being used. The difference is the weight each of these factors will be given in determining the FICO score.

The Better Business Bureau (BBB) has advice on how you can maintain a healthy credit score, and how the new system can work in your favor:

Small slip-ups hurt less:
Debts of less than $100 will have less of a negative impact on your score.

Looking at the big picture:
FICO 08 will take a more comprehensive look at your credit history, so that one negative aspect in your credit history will not necessarily destroy your credit rating.

Less available credit and closing accounts will hurt more:
Until the changeover to FICO 08, a history of using most of available credit had a negative effect on a credit score. That impact will now be even greater. As well, too few open credit accounts, inactive accounts or closing accounts will have a more significant negative impact.

Varied lines of credit will help:
This means a credit score may be improved by having different lines of credit, such as a mortgage, car loan or school loans in addition to credit cards.

Consumers are entitled to a free report once every 12 months. This will provide a report from each of the three major credit reporting agencies, Equifax, Experian and TransUnion. These give the consumer information on how many accounts are open, their credit balance and contact information to close old accounts. For a few dollars, credit reporting agencies will also provide the FICO score.

Paying to find out that all-important number is a good investment for consumers who are concerned about their credit score, and the cost is minimal compared to the cost of being rejected for a loan, paying higher interest rates or even being turned down for a new job.

March 22, 2009
Press Release