Sep 19 2007
FICO Scores To See Some Changes!
Beginning in September we are going to see some fairly significant changes in credit scoring with the release of the FICO 08 scoring model. While Fair Isaac regularly “tweaks” its models to coincide with consumer behavior and economic activity, two of the changes we will see with the new scoring model are the most dramatic changes since the 1980’s. Approximately 60-75 million consumers will be affected by these changes.
The first change and probably most significant is the omission of authorized user accounts. According to Fair Isaac, approximately 30% of consumers have someone on at least one of their accounts as an authorized user. The new scoring model will ignore all authorized user accounts and not factor them into the score.
Authorized users are not responsible for payments on the account but can use the card to make purchases. It also creates credit history for the authorized user. The most common practice for this has been parents adding their children to their credit cards to help them create a credit history or spouses adding each other.
In the last couple of years several companies have sprung up that abuse the ability to add authorized users to an account. They “rent” consumer’s credit card histories to borrowers that have no credit or low scores. A person with credit cards with low balances and good payment histories would “join” one of these companies. A borrower with no or low scores could then, for a fee, rent the credit history of that person by being added as an authorized user to one or more credit cards. Depending on the company the borrower would pay anywhere from $500-$4000 per credit card to be added to. The borrower profits from a better credit score in a short period of time and the person who provided the card profits from a portion of the rental fee that the company pays them.
While this may sound like a win/win situation for everyone it was only a matter of time before the reality of this came to light. Borrowers were boosting their scores based on credit that did not belong to them. The bottom line being they were getting loans based on someone else’s credit. Lenders and industry officials started to look at this very closely and it raised concerns. Fair Isaac realized that this is a loophole in the system and developed a new model that will eliminate this piggybacking.
Once this is implemented many authorized users will see their scores decline and consumers with no or little credit history may lose their scores completely. According to Fair Isaac’s VP of scoring solutions, Tom Quinn, “It was a challenge to find a solution to the problem because there isn’t a way to distinguish between family members being added as authorized users and strangers”.
For borrowers who have benefited from being an authorized user there is an answer. They can apply for secured credit cards. These are cards where the borrower provides a cash collateral deposit that becomes the credit line for the credit card. There are several credit card companies that offer this service and most credit unions offer this for their members. Once a person has had the card for 8-12 months and they prove to handle the responsibility they will usually turn it into an unsecured card. When applying for a secured card always be sure to ask if they report to all three bureaus. The following link will provide a list of companies that offer secured credit cards: http://www.bankrate.com/brm/news/cc/19990823.asp
The second major change in the new scoring model is the addition of two more population segments. Up to now Fair Isaac put consumers in 10 groups of population segments. These groups were in segments of borrowers with good credit and borrowers with poor credit or thin credit files. They have now increased this to 12 segments : 8 for consumers with good credit and 4 for consumers with thin or marginal credit. The results being a consumer with one collection and only 2 late payments would score somewhat higher on the new model than the current model which would put them closer to the same category as a consumer with several collection accounts and late payments. The new model creates a fairer playing field for consumers - especially consumers who may have credit issues.
These changes will start to be seen most likely sometime in September. One of the bureaus will adopt the score model at this time and the other two are expected to incorporate it sometime in 2008. While these changes will affect a great number of consumers the affect will not always be negative. There are always steps consumers can take to keep a good score or work towards a better score.
Credit Tips to Live By
Don’t open new accounts unless needed
Don’t close old accounts
Keep revolving balances low
Pay bills on time