Fair Isaac Scoring System Changes
Did you know a new credit scoring system has been implemented as of early 2008? This is expected to possibly hurt an estimated 60 to 75 million credit consumers, many of which are students. The new credit scoring system is called FICO 08 and has changed the way Fico Credit Scores are being calculated. The FICO credit scoring system is made by the Fair Isaac Corporation and uses Experian, Equifax and TransUnion to deliver a score that will represents your financial risk to possible lenders. The changes are definitely controversial and will affect most everyone regardless of their credit history.
Your FICO score or credit score is probably one of the most important scores you will ever have. Sure ACT, SAT and GMAT scores are definitely important but your FICO score will follow you every where you go for the rest of your life while the others will only become distant and irrelevant memories. Like your ACT, SAT and GMAT scores your credit score will be used to tell lenders who do not personally know you how likely you are to succeed in the financial world. As a low SAT score will keep you from a college of your choice, a low credit score will probably keep you out of the car you really wanted or from being able to buy that home or get that credit card.
Whether you want to believe it or not, your credit report started compiling when you turned 18. Its components are summarized by a number between 300 and 850, and this is your credit score. If you have a long history, the likely hood of any one individual item will affect your score. For this reason, students can be a high risk for screwing up their credit scores because there is no history to offset even the smallest of mistakes. If you do not know your credit score you should find out as soon as possible because you will not be able to fix what you do not know is broken.
Why has the FICO Credit Scoring System Changed? There are many reasons why Fair Isaac has decided to redesign the formula currently used to generate FICO scores. One huge reason is due to the response to the mortgage crisis the economy is in at this time. During the real-estate boom of the last few years many lenders had become overly aggressive in handing out mortgage loans to people who really could not pay them back. They made the mistake of looking only at a borrower’s credit score rather than reviewing the details of the applicant’s credit report, credit history, income, debt to income ratio, etc. These are all very important factors that all go hand in hand when determining a potential credit applicant’s ability to pay back.
Because credit scores have been so manipulated using various loopholes, many people have gotten in over their heads and are now finding they have no choice but to default on there loans. Do you think Fair Isaac’s should be held accountable for this? No, not really, if the lenders had been much more thorough they would not have put themselves in financial danger. However, Fair Isaac is still getting their share of the blame. In response they have changed the way credit will be scored to close some of those loopholes such as authorized user credit cards.
Below is a summary of the FICO 08 Credit Score Changes:
• Applying for new credit accounts could hurt less.
• Having high balances on your credit cards will hurt more.
• Actively using the credit accounts you have may become even more important.
• Having both revolving and installment accounts on your report will help you more, the FICO 08 will be more sensitive to your experience with different kinds of credit.
• No more piggy backing to build your credit (this would not affect cosigner accounts)
How does one respond to these changes. You need not think of any of this in a negative way. The Fair Isaac Scoring system is there to protect the consumer as much as it is to protect the other side of the coin, the lenders.
If you do what you know is right when concerning your credit, think about your decisions and really know were you are financially, you will always come out on top.
Student credit cards.com @ July 8, 2008