How Credit Scores are Changing in 2008 August 18
FICO – an almost universally used credit scoring system that was invented and is calculated by the Fair Isaac company and then sold as valuable information to financial services companies – is changing this year. As a result, many consumers will have their credit scores evaluated differently, and they may wind up with worse credit than they anticipated.
Many industry observers believe that the main impetus for the changes in scoring methods is the catastrophic loan industry crisis. FICO hopes that the changes will help to provide a more accurate way to predict credit risk, thus improving the chances that when banks make loans those loans will be repaid in a timely manner.
Scores are still based on a point system that ranges from 300 to 850, and they are calculated based on factors such as payment history, length of credit history, amount of outstanding debt, the ratio of debt to credit, and the type of credit most frequently used. But there may be new categories of debt.
But one of the biggest changes is that those consumers who are authorized users on someone else’s account – like joint signers on a credit card account, for instance – will not longer be considered. In other words the person who originated the account or loan will be considered, but any other persons they authorize to use the account – or credit card, for example – will not be plugged into the credit scoring formula. Authorized second party users typically include spouses or the primary cardholder or children using their parents’ credit card accounts.
Persons who have been paying their credit card bills on time as authorized users (but not primary cardholders) may have accumulated years of excellent credit history. Now that history will be wiped off their score, and that is expected to have a negative impact on the credit of about 75 million people.