What is FICO 08?
FICO 08 is Fair Isaac Corporations new scoring model which aims to more accurately measure credit risk.
What does the new model look like?
Scores will still range from 300 to 850 and will continue to look at factors such as
- Payment history
- Length of credit history
- Amount of debt
- Ratio of debt to available credit
- Type of debt
- Excessive amount of new credit
- Special emphasis on debt mix; Consumer with revolving and installment credit will fare better than one with revolving credit card debt only
How is FICO 08 different from the previous scoring model?
Among the big changes in the FICO scoring model 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. For example oftentimes parents make children authorized users of their cards in order to help them build credit.
Fair Isaac estimates that approximately 30% of the 165 million consumers with enough information on their credit reports to have a credit score calculated have someone on their account as an authorized user. A major reason this aspect of scoring is changing is because lenders and industry officials have raised concerns over what is known as “piggy backing”. Piggy backing is a form of credit renting, a growing practice that allows people with bad credit to piggyback on the strong payment histories of credit card holders by becoming an authorized user on the account.
Until recently, I wasn’t even aware that there were actually companies out there renting a spot on one person’s credit to another person so they could build their credit as an “authorized user”. This is how it works - Person A with no credit score or a low credit score pays a fee to rent a spot as an authorized user on Person B's account. This enabled the authorized user to give a little boost to their credit score, thereby making them eligible for loans that they previously wouldn’t have qualified for. Just another aspect of the mortgage money machine that we can probably do without. A child on a parents credit card as an authorized user is a little different than buying a spot on a strangers credit report to improve your credit situation.
I wonder how big of a part this credit rental practice played in the sub-prime mess?
What does this scoring model mean for those who have piggybacked on another person’s credit?
According to a USA TODAY article comment by John Ulzheimer, President of educational services for Credit.com said - once this new scoring model is adopted, millions of authorized users will see their credit scores decline and authorized users with no credit history of their own will see their credit score disappear.
An additional change to the scoring model will be that the population will be divided into more segments than the previous model.
Their will be 12 segments divided as follows:
- 8 for those with good credit
- 4 for those with bad credit
Situations that will be less detrimental than in the previous scoring model:
Occasional late payments
Applying for credit from multiple sources
Having a mix of credit types ie.) Mortgage, auto, credit cards
If you are 90 days late on one account but current on your other accounts
Situations that will be more detrimental to your score than in the previous scoring model:
Consumers who are consistently late on payments
Spending near the limit of your total available credit
90 days late on one account and you have other delinquent accounts
Being an authorized user on someone else's account with good credit will no longer help your score
Now that we've established what this model will look like and mean for our credit scores, it will be interesting to see whether or not FICO 08 ever sees the light of day. There are many out there that believe that FICO 08 will never come to fruition but that's another post all together.
