New FICO Credit Scoring System

If you're like me, daily routines are necessary. I take the same route to work everyday. I eat a bowl of oatmeal every morning at my desk (but change the flavors). And I always check my e-mail before I start any work. But sometimes change can do you good.

The online edition of The Wall Street Journal recently reported that Minneapolis-based Fair Isaac Corporation, creator of the widely used FICO credit score, has made significant changes to its scoring model. Coined FICO 08, the new scoring model is intended to greatly improve the system's ability to predict the chances of a borrower defaulting on a loan. FICO officials say the improved scoring system will help lenders reduce the default rates on their consumer credit by 5 to 15 percent. The model is intended to be more forgiving of occasional slips by consumers (that's me), but will take a harder line on repeat offenders.

At a time when the subprime mortgage crisis and skyrocketing foreclosure rates are affecting major aspects of the economy, lenders say they are eager for more-accurate measures of credit risk, The Journal reports. The FICO score, which is used by 90 percent of the 100 largest banks, plays a major role in determining if a consumer qualifies for various home, auto, and business loans. Consumers could expect to see the new model in affect by this spring.

The Journal reports: Fair Isaac, which last revamped its scoring model earlier this decade, says it is accelerating its FICO 08 rollout, partly in response to lenders' demand for better risk-management tools.

Credit score factors
The new version of the FICO score will pretty much look the same to consumers and lenders. Scores will still range from 300 to 850 (the higher the better) and the model will continue to look at the same factors to determine scores: consumers' level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used. But the new model will more finely slice and dice the information in consumers' credit files to do a better job of separating the 'good risks' from the 'bad risks,' particularly for subprime borrowers; those with 'thin,' or young, credit files; or consumers who are actively seeking new credit.

The Journal article says FICO 08 will also draw greater distinctions among serious delinquent borrowers, those who are at least 90 days late in making a loan payment. Traditionally, many credit-scoring models grouped subprime consumers into one general category. But Fair Isaac says its new model will give a higher score to a borrower in arrears if they also have a number of other credit accounts in good standing. Conversely, a person's score could drop if he or she has multiple delinquent accounts.

The new scoring model also aims to curtail the growing business of allowing people to polish their credit by 'piggybacking' on someone else's good credit history. In recent years, credit-repair Web sites have sprung up that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. When scoring a consumer, FICO 08 won't consider borrowed credit-card accounts by an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score.

Do you think the changes to the FICO scoring system will give a more accurate picture of a consumer's credit history?

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