How Will the FICO Score Changes Affect You?How Will the FICO Score Changes Affect You?
By Garrett Sutton, Esq.
For many business owners and real estate investors, their personal credit scores are almost as good as money in the bank. With strong scores, they can get access to credit when they need it to make a deal happen. Without them, it gets a lot harder.
FICO scores are undergoing their first major change in ten years. And more importantly, FICO is working with the credit reporting agencies to start ignoring authorized user accounts. What do these changes mean to your scores and your business?
First, the quick background: FICO scores are created by Fair Isaac. They are the most widely used credit scores in the industry. They range from 300 (a very low score) to 850 (a perfect score achieved by very few people). Generally, if you can keep your FICO score above 720 you will be able to get easy access to credit at good rates.
- Your scores are not sitting in a computer database. They are created when requested by you or lenders.
- Your scores vary depending on the data provided by the credit reporting agency used to calculate your score.
- FICO scores are often customized for lenders, or for different industries such as auto insurance.
So what is changing?
First the number of scorecards are increasing from ten to twelve. FICO groups consumers into "scorecards" depending on characteristics they meet. While FICO doesn't reveal those scorecards (it's part of their secret sauce), one example is the "had a bankruptcy" scorecard that you would be scored under if a bankruptcy appears on your credit file.
Again, we don't know specifics, but it appears some of the changes are designed to help more accurately score consumers with little credit history (called "thin files") as well as those with risky credit histories. (FICO has been accused of contributing to the current mortgage meltdown, though I don't completely agree with that assessment.)
Even more important is a change that will take place later this year and into 2008, where the FICO score will start bypassing all "authorized user" accounts when calculating a consumer's score. An authorized user is created when someone adds another cardholder to their existing credit card account. The authorized user typically benefits from the entire credit history of the primary cardholder. The practice of using an authorized user account to build a credit history is called "piggybacking."
This technique was picked up by credit repair firms, who were actually serving as middlemen to "rent" authorized user accounts from people with good credit, to strangers with lousy credit. After an uproar in the news media, Fair Isaac announced the system would change to ignore authorized users.
However, this change is likely to affect many consumers. Around 30% of all credit reports contain an authorized user account. Some of those consumers will see their credit scores drop when those accounts are ignored.
It's impossible to predict whether your score will go up or down after these changes. Some of the changes, like ignoring authorized users, will take place immediately. For others, it will be a while before they are adopted by lenders
The best advice is to monitor your credit score. Go to www.annualcreditreport.com and make sure you have your own solid credit rating.