What FICO 08 Means to Your Credit Score

Hello, and welcome to Your Money 2.0. I’m Christopher Viale, president and CEO
of Cambridge Credit Counseling. As you may have noticed, many credit card
issuers have begun increasing their interest rates and shrinking the credit limits of their
clients. Now comes news that Americans have something
else to contend with when it comes to their credit score – FICO 08. Why is this so important? Your FICO score determines how far your money
will go. Most major financial institutions use your
FICO score to determine what type of risk you are – the higher the risk, the more
interest you pay on loans. The new scoring model, which the Fair Isaac
and Company began developing two years ago, recently took effect in early 2009. While the general parameters used to determine
your overall credit score have remained the same, the new scoring model attempts to refine
the process used to predict borrower default. Most of the changes within FICO 08’are designed
to more accurately depict the current credit climate. As a result, the new scoring model will forgive
occasional slip-ups; however, repeat offenders will be more adversely affected. For instance, accounts that are forwarded
to collections that total less than $100 will matter less in the calculation of scores. Obviously, collections accounts are something
you want to avoid; however, with the current state of the economy, this provision is a
step in the right direction. The FICO model has been redesigned to take
a more comprehensive overview of a profile to derive a score, so, for example, if you
have just one account that goes to collections, it should count less if everything else looks
good. The new formula also favors a mix of healthy
accounts such as credit cards, car, personal and student loans, so maintaining a diverse
credit portfolio should help an individual increase his or her score. There are, however, two changes that will
bring down an individual’s score. Both stem from an industry-wide effort to
control risk, which, in this case, has to do with the amount of credit you’re not
using. These days, more lenders are closing cards
that aren’t being used. Keeping a card open represents a cost to the
lender, since they still send out statements every month, but it also represents risk,
since the cardholder could suddenly start borrowing against their limit as times get
tight. Closing the card will negatively impact your
score, so you may want to contact your lender to discuss their policy. The other change under FICO 08 is more troubling. As I mentioned earlier, it involves credit
card companies attempting to decrease their exposure to risk by lowering the credit limits
of their clients. Let’s say you had a credit limit of $5,000
dollars and a balance of $1,000 – you’re using 20% of your available credit. But if your lender reduces your credit limit
to $2,500, without making another charge, you’d suddenly be using 40% of your available
credit, and your credit score would come down. It’s recommended that you use no more than
30% of your credit limit at any time, which could help you avoid being perceived as a
risky client by your lenders. If your lender reduces your credit limit,
you can call them to ask for an explanation and contest their decision. Finally, Fair Isaac made adjustments to its
piggybacking provision. Piggybacking occurs when a credit cardholder
authorizes an additional user on his or her account, specifically so that person can benefit
from the cardholder’s good credit standing. While this practice has helped millions of
college students and spouses establish their credit history, some disreputable organizations
recently began to take piggybacking to extremes. FICO has amended piggybacking to allow spouses
and children to improve their credit profile as authorized users, but have banned the inclusion
of strangers. As always, you should review your credit report
for accuracy each year. For information on how to receive copies of
your report, visit annualcreditreport.com. For those who are interested in receiving
a complimentary credit score, you can visit Credit Karma.com. Well, that’s it for this edition. We welcome your feedback and ask for your
thoughts and suggestions by e-mailing us at [email protected] Thank you for watching. Until next time, I’m Christopher Viale for
Cambridge Credit Counseling.

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