FICO '08 Update: Roll-out in 2009

Last year, we covered the soon to be released, FICO 08. Due to litigation between Fair Isaac Co. and the credit bureaus, the roll-out was delayed. However, the lawsuits are now settled. The three major credit bureaus have announced plans to roll-out the changes at various points in the year.

 
 

Last year, we covered the soon to be released, FICO 08. Due to litigation between Fair Isaac Co. and the credit bureaus, the roll-out was delayed. However, the lawsuits are now settled. The three major credit bureaus have announced plans to roll-out the changes at various points in the year.

Here are the changes to FICO 08 that have been announced by Fair Isaac:

  1. The score will be more sensitive to capacity (i.e. the percent available to use on revolving lines-of-credit). This is a potentially big issue for members in 2009 as many national credit card issuers have begun to lower limits or close accounts with little or no warning due to economic concerns.

    Members with revolving balances or few high-credit cards will be the most affected by this change. They should be counseled to periodically use high-limit cards so that the issuer will not cancel the card.

  2. The score will react more negatively to all types of activity if a person has limited history (e.g. only a few open, active loan accounts). In other words, in the statistical eyes of Fair Isaac, less debt is not necessarily a good thing. You may think this change is ridiculous, but in a way it makes sense: in order for statistics to more accurately predict your credit future it is necessary to have more than a few accounts.

  3. FICO 08 will ignore collection accounts where the original debt was less than $100. In the past, small collections amounts have had a significant negative effect on scores.

  4. Fair Isaac states that the new version will be less punishing to those who have had one serious credit setback, such as a charge-off or repossession. All other active loan accounts must be in good standing. Therefore, an isolated offense will not hurt a score as much for an otherwise good credit member as it will for the serial credit offenders.

  5. A practice called "piggy-backing", where people with poor credit scores "rented" the good credit card history of others by becoming authorized users, has increased focus on score fraud.

Last year Fair Isaac announced that it would combat this potential score fraud by ignoring all authorized-user accounts. After the announcement, consumer groups complained that ignoring authorized user accounts would negatively affect the millions of people that legitimately benefit from the current approach, including parents helping their children establish their individual credit.

Now, FICO 08 will factor in authorized-user accounts "while materially reducing potential impacts to the score." Fair Isaac has not stated how this will be done, one potential way is that the new score will count a limited number of authorized-user accounts and ignore the rest.

FICO 08 implements some important changes that will be better predictors of future delinquency. I would encourage credit unions to contact your credit bureau sales rep and let them know that you want FICO 08 when it becomes available. Keep in mind that it will be at least a few years before all lenders convert to FICO 08, so lenders will be using two different scoring methodologies for the next several years. This will increase member confusion as they may qualify for different loan terms at many local institutions based on which FICO the lender is using. Your staff should be educated on the differences as well as your credit union’s own policy regarding the FICO changes.

 

 

 

Feb. 2, 2009


Comments

 
 
 
  • It seems like the second and fourth changes are dangerous together. If they system looks unfavorably upon those with a limited credit history, and forgives those with one major setback, then it seems as if those beginning to build credit are encouraged to take unnecessary risks. Imagine a college student: he stays current on his one credit card. That's not doing much for his credit, especially with the new changes. So he chances buying a car, realizes that can't afford the monthly payments, and gets the car repossessed. While there may be damage to the student's credit score, there are still clear incentives toward financial risk taking.
    Anonymous
     
     
     
  • #3 is critical. A $5 charge on a card that I didn't even know I had cost me 40 points on my credit score. Turns out the company had my wrong address.
    Anonymous
     
     
     
  • excellent summary. Is there data that would show how these changes affect the distribution of scores?
    Anonymous
     
     
     
  • Changes to the FICO formula will make no difference until lenders quit relying on the number!!! Keeping one’s balances low, paying on time, not opening new debts leads to a great score. But, even with a 770 FICO, making a $500,000 mortgage loan for a person who makes $4500 per month. And, I still have a philosophical problem with allowing authorized user accounts count in one’s FICO. Taking it away would negatively affect people? Isn’t that the point? Giving my son or daughter my 10 years of credit does not indicate that he or she is a good credit risk. If that’s the case, then the authorized user needs to get up, pay a higher rate until he can prove he is a good risk, and then apply for a lower rate or a new card. Why do we not accept personal responsibility? If you have no credit, you pay a higher amount. I don’t get it.
    Anonymous
     
     
     
  • What is conspicuously absent from all of this is the status of Fair Isaac's relationship with Experion, which now severed--leaves lenders in a bind and consumers with an even greater sense of dismay and quite possibly disdain.
    Frank McBride