FICO Prepares to Change Its Credit Score Formula
December 22, 2008 by Miranda Marquit
Filed under Finance
FICO is the most well-known name in credit scores. So it is big news when FICO prepares an overhaul of this magnitude. The company has tinkered with its credit scoring system in the past, but in 2009 FICO prepares for the largest change to its formula ever. So be prepared. The new FICO score may have a big impact on you.
Biggest FICO credit score change: Fine shadings
The change that will have the biggest effect on your credit score is likely to be the fact that the FICO score formula will now take into account degrees of your habits and credit history. One missed or late payment will be graded differently than if you have three missed payments. This change will likely boost many FICO scores.
However, there is an issue with what FICO will be considering. Will the company — with the availability of technology to better track habits — begin to include the types of purchases you make in your overall credit score? That remains to be seen.
Keep an eye on your credit score, though. There are estimates by FICO that between 40% and 50% of consumers could see their credit scores change by 20 points, in either direction.
Improving a credit score through piggybacking
Piggybacking (the practice of being an “authorized user” on someone else’s account) is also being affected by the new FICO score formula. It will look at who is piggybacking (children, spouses), and also make it harder to improve one’s credit score through piggybacking. This, according to Credit.com, is most likely to affect a large amount of women, whose credit scores are partially dependent on their husbands’ scores.
What do you think of the changes to the FICO score?
I remember when they changed the piggy backing rule not too long ago…a large number of heads rolled back then.
I don’t think it was fair for them to change it the way that they did but I definitely understand that there had to be a change since the practice was being abused. There were some really good people who had their credit score drop into the abyss literally overnight :-(.
It will be interesting to see what is in the new formula and how it affects scores. In the meantime, I’ll start talking to my clients and preparing them for the formula change.
Thanks for the post.
I’m no sure what the new formula will be. FICO never really revealed all the details before. But I do like that it will include better discrimination in terms of different practices. It’s pretty harsh to sink your entire score if you are a day late on one payment after years and years of being on time.
I don’t care what changes they make. The FICO score and the entire consumer credit scoring industry will remain as a gigantic shackle around the minds of consumers who follow along like confused sheep. We are being abused by the extensive use of the credit score in all aspects of our lives. It is sadly pathetic that we allow this to happen. Baaaaa ……
As usual, Mr., you make a very valid point. And it is true that the use of the credit score is becoming waaaaaay too prevalent — used for just about everything. And, of course, this threatens our privacy and to some extent our identities, since our SSNs are given out regularly.
A couple of things have delayed the rollout of this new score. Remember, it was originally called “FICO ‘08,” but none of the three credit bureaus would adopt it. Not coincidentally, the three credit bureaus went into competition with FICO since the last major change in the FICO algorithm. Equifax, Experian and TransUnion formed a competing credit scoring company called VantageScore. The three have become competitors as well as customers of FICO, slowing their desire to adopt the new score.
On piggybacking, FICO is saying, without being precise, that it has figured out how to distinguish piggybacking between strangers, which it considers borderline fraud, and piggybacking between relatives, which it thinks is fine.
Thank you for adding more information. I’ve seen a little bit of the VantageScore. It’ll be interesting to see how the piggybacking thing plays out.
Very interesting. With all the data out there, I could envision a sort of micro-score for propensity to pay back a specific amount on a specific item. Wild.
It is certainly possible. There are some companies that keep track of consumer information — like whether you are buying something considered a “need”, or whether you spend a lot of money on frivolous items. It is possible to gauge how much of your debt is from spending on things like car repairs or on things like eating out.