Your Credit Score

New Credit Score Formula: How It Affects Your Borrowing Power

If you're concerned about your credit score, what it contains and how it is calculated, take your time to review the latest changes. They may not only affect your future eligibility for credit cards and installment loans but may also improve or reduce your chances to find a well-paid job.

The officially named "FICO Risk Score, Classic 08" but more commonly referred to as "FICO 08", the new formula has been waiting for its implementation inadmissibly long. In January 2009 it (implementation) was announced but it is expected to take some more time before lenders and consumers feel the impact.

One of the major adjustments to take place in the new model will be TransUnion's different score versions for auto lending companies and credit card providers. Mind it when you plan to apply for credit card online or take out an auto loan.

Though there are not any major improvements for consumers, the new credit score model will raise the precision of banks' decision making by up to 15%.

The better accuracy of forecasting the future borrower's payment behavior does have indirect advantages for the customer. The major advantage is a fairer adjustment of interest rates between good and bad credit borrowers. It is even more actual today when, attempting to bring down the risk of losses, credit companies raise APRs for all cardholders and shorten or eliminate 0% intro APRs for good accounts.

Another improvement to favor customers is reconsideration of piggybacking. Fair Isaac was at first radically against the credit score model including the authorized user into its calculation. But the potential benefit of the situation when a parent adds their child onto their credit card account to start the child's credit history encouraged the company to allow the legitimate use of the practice. Abusing practices such as paying money to find and use a good credit card account for personal score's boost will be prohibited.

Under the new FICO 08 model, your credit score will continue to assess your borrowing risk through the 300-850 score range, where the higher number shows a better risk and potentially more profit for the lender.

Your credit score will also exclude minor mishaps, such as small balances below $100, from its calculation. It will add scores to consumers who have a lengthy history of timely payments on a mix of accounts - credit cards, auto loans, student loans and others. Vice versa, FICO 08 will score less favorably those who use only one type of account, even if the account is in good standing.

If you are a type of customer who has a large number of active good credit cards, your credit score will be higher. If there are only a few paid on time accounts, the score will be lower. Remember, multiple credit card applications over a short period of time still hurt your score.

The time for adoption of FICO 08 varies greatly with all credit bureaus but Fair Isaac is determined to encourage lenders to switch to the new formula as soon as possible.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.