How FICO 08 Changes Your Credit Score

The FICO system, whose credit scores lenders use to determine whether you’re credit-worthy and how favorable to set the terms, is set for a makeover. An article in today’s WSJ reveals more of the changes in store than previously disclosed, here’s how they’ll affect your credit score:

+ situations where scores will rise, – situations where scores will fall

+ Mess up every so often
- Consumers who consistently mess up
+ Won’t get dinged as hard when you apply for credit from multiple sources
+ Having a mix of credit types, like having a credit card, mortgage, and auto loan at the same time
- Spending near the limit of your total available credit
+ If you’re 90 days late on payments on one account and your other credit accounts are in good standing
- 90 days late and you have other delinquent accounts
- Being an authorized user on someone else’s account with good credit will no longer help your score

Default Lines: The New Math Of Credit Scores [WSJ]

Comments

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  1. SOhp101 says:

    Uh, did they take universal default into consideration? Some banks will do this even when the card in default is the competitor’s.

    Sounds like they’re penalizing people who actually pay all their accounts on time while rewarding those who will fall victim to universal default.

  2. weave says:

    Hmm… I don’t own any credit cards, just debit cards and a traditional Amex card that is due in full each month and I paid cash for my last car. I do have a mortgage though. My current score is 808. Worried this will screw me over and I’ll have to play games like get a credit card or two and let it run a balance for no reason at all except have variable types of credit payments. :-(

  3. cmdr.sass says:

    @weave: It sounds like you don’t need credit for anything, so a credit score is of no use to you anyway. Don’t worry about it.

  4. darkened says:

    This actually sounds like it will benefit me seeing as I only have poor account standing with 1 card anymore and all my current lines are paid as agreed or in full each month and I make on time more than min. payments to my student loans and auto loan. And starting this month or worst case scenario next month I will be able to apply all my payments i made else where to that final account.

  5. Having a mix of credit types, like having a credit card, mortgage, and auto loan at the same time

    Why is this better than having two credit cards?

  6. @Rectilinear Propagation: Never mind. RTFA

  7. weave says:

    Of course I might need credit someday, like to buy another house, refinance, or deal with an unexpected large expense that is above my stash or if it just makes sense to do so (like if my last car had a very low interest rate loan deal that’d make sense to take it).

    yeah, I don’t need credit to buy an iphone — but for the first 15 years of my adult life I was horribly in credit card debt. I just won’t go back there.

  8. weave says:

    I do like the idea that having one bad account will not really affect your rating. That should help kill the idle threats of some folks to ruin your credit score unless you give in to their pressure tactics, whatever that might be.

  9. JustAGuy2 says:

    @weave:

    With your traditional Amex, you’re showing that you’re using credit wisely, so you should be just fine.

  10. ckaught78 says:

    Most lenders take years to adopt new FICO score models. Chances are FICO 08 won’t affect you for quite some time.

  11. johnva says:

    @weave: You never have to run a balance from time to time to build credit. The credit reports have no way of determining whether you are actually carrying a balance on a credit card or not; they just report what your statement balance is in most cases. This is a common misconception.

    @cmdr.sass: Unfortunately you often do still need a good credit history even if you don’t intend to apply for credit. It affects insurance rates, whether people will lease you an apartment, whether various companies (like some utilities) will require you to pay a large deposit when opening an account with them or not, and even whether you get a job in some industries.

  12. royal72 says:

    am i the only one who sees fico like the riaa and this the equivalent of drm-free music… dear fico, you are still a middleman making money from nothing and quite simply, a fucking cancerous piece of shit. please feel free to roll over and die.

  13. CumaeanSibyl says:

    @SOhp101: I’m not really getting that from the article. It’s not that missing payments will get you a better credit score than paying on time, it’s just that you won’t be penalized as heavily as before, so your score will go up (but still be lower than someone who pays all accounts on time).

  14. darkened says:

    @johnva: Yes your credit report can show whether or not you carry a balance it’s how they determine what % of your credit is in use, and the higher the % the lower your score goes.

  15. ShortBus says:

    @royal72: I think you’re confused. Fair Issac (the company behind FICO scoring) created a mathematical formula. Lenders take the credit reports provided by TransUnion, Equifax, and Experian and give it to Fair Issac to run through their super-secret formula. This summarizes all the info in your credit report into a single number.

    Lenders continue to use FICO scoring because, hey, they’ve noticed a pretty accurate correlation between late pays, defaults, etc. and a person’s FICO at the time of application. Now why is this so evil of a practice?

  16. ShortBus says:

    @darkened: True, but your credit report only shows your credit limit, the highest balance you’ve ever had on the account, and your current balance. I could charge $3k worth of stuff on a $5k credit card. Whether I paid it off within the grace period, or just made the minimum payment, my credit report would look the same (from a FICO scoring perspective).

  17. KillingMyBrainCells says:

    Not sure what my FICO score is, but since I keep getting a letter from the bank that issues my credit card, telling me that my limit has been raised again( think it’s up to $20,000). It must be pretty good

  18. Tank says:

    the FICO is it’s the first test for underwriters to decision a credit transaction. the trouble with this is, if the score doesn’t fit their guidelines, they don’t bother going on, even though they almost all use an internal scoring system to make a final credit decision. a customer may score high internally, but if the FICO is too low, they won’t even bother looking at the rest of the picture, and normally, no amount of talking will get them to change their mind.

    most underwriters don’t understand a loan is an asset, not a liability.

  19. anatak says:

    @cmdr.sass: Spot on. If you are not going to borrow money, then don’t waste your time playing some game to maintain a credit score. Your credit report is all that really matters, and so long as its clean you’ll be just fine.

  20. anatak says:

    @KillingMyBrainCells: Actually, no. Not necessarily. Your FICO score is not a measure of winning. And credit offers =/= high FICO score. They send those to dead people and dogs too. For example, credit companies are very interested in offering credit to people who have filed bankrupcy, because they have a “taste for debt”. They’d rather collect fees and late charges than offer it to someone who is ‘credit-worthy’.

    @Tank: I think what you are looking for is a manual underwriter. They still have a brain and are not caught up on just a FICO score. Also, they’ll understand that a loan is a liability and will be less likely to convince you of some lie like, “a loan is an asset”.

  21. KillingMyBrainCells says:

    @anatak: I should had added that I payoff my bill every month.

  22. johnva says:

    @darkened: You’re simply wrong. As SHORTBUS said, it just doesn’t give that information. It just uses your “current balance” as reported by the lender which is usually your statement balance. Even if you pay your credit card off entirely every month, your “utilization” will show up as the percentage of your credit limit that you are charging between statements (unless you make extra payments before your statement posts). They have NO WAY of determining whether from your credit report whether you are paying interest or not.

  23. num1skeptic says:

    well that kicks azz. it like you can say f.u. to one of your bills as longs as you pay all the rest! lol-too funny! and you can be late! wow. looks like 08 is going to be my best year yet!

  24. johnva says:

    @anatak: If your credit report is clean, your FICO score will generally be pretty good as long as you have some credit history. No one is suggesting you “play games” to increase your score, although it might be intelligent to understand the scoring system in order to maximize your score before applying for something like a mortgage where a good score could save you a huge amount of money.

    Also, I think you’re wrong about the main reasons credit companies want to offer credit to people who have filed bankruptcy. It’s not because these people have a “taste for debt” so much as it’s the fact that a) they are “subprime”, and hence more profitable since they can be charged a higher interest rate (why else do you think all the mortgage companies wanted in on the subprime mortgage market?) and b) they are usually prohibited from filing bankruptcy again for awhile, which makes them lower risk than a subprime customer who hasn’t filed bankruptcy. So it’s the combination of high profitability and lowered risk that attracts them specifically to recently bankrupt customers.

  25. frogpelt says:

    @weave:
    I think you just wanted to brag about your credit score.

    Brag on.

  26. Jeremy says:

    Fico is feeling the heat. There is a full court press from the 3 credit agencies to push their own scoring system. Fico’s market dominance may be coming to an end. Time to adapt or die.

  27. Tank says:

    @ANATAK: manual underwriters are the one’s i’m talking about. i suppose you could find an “old school” underwriter at a credit union, or small locally owned bank, but for the big, retail banks this is the norm.

    and yeah, a loan is a liability to the customer, but not to the lender, it’s an asset, because it creates profit. they can sell a loan, not a savings account.

  28. GothamGal says:

    I have a credit score of about 730. I have 3 credit cards that I pay off every month and the AmEx, which is also paid off every month. I don’t drive, so I don’t have a car loan, and I choose to rent because I don’t want a big mortgage over my head. So with my chosen lifestyle of being practically debt-free except for rent, food and utilities, my score is not favorable because I do not have a variety of loans?

  29. Schmee says:

    @weave: Amex = credit card

  30. maddypilar says:

    @KillingMyBrainCells:
    Back when I had terrible credit they raised my limit every month to give me more room to spend. I have great credit now and a FICO score over 750, I haven’t been given a credit increase in quite a while.

  31. johnva says:

    @GothamGal: No, it’s still a decent score. It just means that you don’t have demonstrated history with all of those other types of loans. That means you are higher risk from the bank’s perspective because you’re more of an unknown quantity. They will always prefer someone that has actually directly shown they can handle many types of credit over someone who has not, even if they have no reason to believe that you wouldn’t. Credit scores are a risk model, not a judgment on how worthy you are.

  32. hapless says:

    @GothamGal:

    730 is an excellent score. I’m shocked that it’s that high with so little history of indebtedness.

  33. anatak says:

    @GothamGal: With your chosen lifestyle of being debt-free (good call,btw), why do you care what your credit score is? You don’t need it.

    @johnva:
    A clean credit report =/= good credit score.

    Yes, people are/do suggest playing games to maintain a credit score (whoo-hoo, up 5 points!!). Its stupid, pointless, and the credit industry loves it.

    Yes, I am right about credit issuers going after high risk borrowers because they have a “taste for debt”. They are willing to stay in debt and pay payments forever. Its a direct quote by Elizabeth Warren from Maxed Out. You can think whatever you want, it doesn’t make my statement untrue.

  34. num1skeptic says:

    @hapless: thats why. i’ve seen 740′s with just one card on bureau and nothing else. (i work in personal finance so i look at bureau’s all day long.)

  35. anatak says:

    @hapless: I’m in that same range. Been debt-free except for the mortgage for 3 years and never had a credit card in my name.

  36. GothamGal says:

    Thanks for all the comments, but to answer Anatak’s question about caring about credit: it’s a just-in-case thing. I may want to get a car or a house, but a car I would most likely pay cash for; a house, I definitely cannot.

    Originally, I even cringed at getting credit cards, but I had no credit for the longest time and decided to fix that.

    Also, with renting, they pull your report and even some jobs. So, it is important to have good credit as you are judged by it.

  37. gingerCE says:

    Someone (my dad) has over 20 credit cards and over 250K, maybe 300K in available credit on these cards alone. He doesn’t carry any balances. Does that mean his score will rise because he has so many cards that are at zero? He has a mortgage and recently was a cosigner on my sister’s car (she got the mercedes suv–sigh–but I like my paid for civic). I did think being a cosigner would ding his credit but maybe not now. Anyway I was helping him with his credit report and told him he should probably close the cards he no longer uses (or even has cards for)–but would that be a bad thing?

    Also, does FICO take into account bank accounts and how much savings one has accumulated? Or not. I have another sibling who paid over $1600 in one year in overdraft charges to her bank by using her debit card. She has since organized her money but I wonder if having so many overdrafts would hurt her credit score.

  38. weave says:

    @frogpelt: Yeah, actually, I was quite happy with my score. I never checked it before. I only checked it last night because I went to register an iphone through the online activation process and it told me my credit check failed and I could only get a prepaid account.

    So I freaked out and figured something ruined my credit score, possibly fraud, and went through a service Amex provides to sign up to see my real credit score (yes, I know you can get a freebie report sans score once a year).

    Something else must have triggered that from AT&T because I went in to a store today and had them run the credit check and it was fine and I got a credit number to use to activate the phone.

    @ SCHMEE : Techically a traditional Amex is referred to as a charge card, not a credit card, since its balance is due in full every month. (Amex *does* offer lots of credit card offerings as well)

  39. johnva says:

    @anatak: I don’t do anything special to increase my credit scores, and they’re really high. A clean credit report isn’t everything, but it goes a long way towards getting you a good score if you have an actual credit history. Beyond that, I don’t care what my score is. The only time I would care about it is when I was applying for a large loan like a mortgage. Also, why do you think “the credit industry loves” people playing games with their scores? This makes the scores less effective at gauging risk! You aren’t required to take on ANY debt to build credit…just pay your bills on time on an account that gets reported.

    And what I said is still correct about why they target people who have just been through bankruptcy. What you are suggesting is another possible reason, but not a proven one. Debt is not evil…it’s just a tool. If you’re higher risk, you’re going to pay a higher interest rate. And that means you’re more profitable to a lender if you keep paying.

  40. johnva says:

    @gingerCE: To answer your questions, from a credit score standpoint you should NOT close a credit card you aren’t using unless you have a good reason to do so (like an annual fee). It’s especially important to keep open cards you’ve had for a long time, as they increase your average account age. The main reason my credit score is nearly 800 is that I don’t utilize much of my credit lines but I have large credit limits. So having large credit limits open, like your dad does, increases your score in general. The only time you should close accounts is if (for example) a mortgage lender directly tells you you need to in order to get the loan during a manual review of your credit report. It won’t hurt you to just wait until then to do it since your score will benefit in the meantime.

    Credit scores do NOT take assets or income into account, because they do not have access to that information. They only use the information available via your credit report. Internal risk models used by banks and credit issuers, however, may use this information if they ask you to provide it to them on an application. Overdrafts may get reported as a delinquent account to a credit agency however, especially if you don’t pay them off in a timely manner. But they don’t have access to that unless the bank reports it.

  41. chiieddy says:

    @weave: You realize 808 is an incredibly high credit score, right? 720 is considered a very good score and about where you’ll start getting the best loan rates.

  42. anatak says:

    @GothamGal: “….they pull your report and even some jobs. So, it is important to have good credit as you are judged by it.”

    For some jobs, they pull your credit report. There is an important difference between your score and your report. It is important to make sure your credit report is accurate as somewhere around half have inaccuracies. Employers are not pulling a credit score and saying, “632? we’re not hiring her!”. They are pulling your credit report to look at fiscal responsibility. See, if you are going to be handling corporate money, they might want to see how you handle your own money. A FICO score does not tell you that.

    And yes, sadly, some rental agencies are going to look at your credit score. If they turn you down because of it (and you actually have a good record of paying your bills), they you may have to talk to them and get them to use their brain. Show that you payed your previous landlord early or on-time for two years. That will also go a long way to securing a great rate on a mortgage through manual underwriting. So shred the card, keep paying your bills on-time and you’ll be fine.

  43. anatak says:

    @johnva: “I don’t do anything special to increase my credit scores, and they’re really high.”
    ….

    “…you should NOT close a credit card you aren’t using unless you have a good reason to do so (like an annual fee). It’s especially important to keep open cards you’ve had for a long time, as they increase your average account age. The main reason my credit score is nearly 800 is that I don’t utilize much of my credit lines but I have large credit limits. So having large credit limits open…”

    hahahahaha
    yeah, glad to see you aren’t doing anything special to maintain your precious credit score. If you are going to talk out of both sides of your mouth, then at least do it in separate threads.

  44. anatak says:

    @gingerCE: Being a co-signer will ding his credit when she stops paying on her Mercedes. There is a reason they asked for a co-signer and its because they do not expect her to repay.

    Keeping the cards open will be a problem when someone gets a hold of the numbers and starts charging them up – possibly without him knowing. If he doesn’t use them, then close them out and shred the stupid things.

  45. johnva says:

    @anatak: What I said was that I’m not doing anything special. I’m not. All I’m doing is leaving credit cards I don’t use open. Not that hard.

  46. johnva says:

    @anatak: Terrible advice from the standpoint of credit score. You’re not liable for fraudulent charges anyway if you report them, and it’s really stupid not to at least check your monthly bill.

  47. DJ-Pandemic says:

    @GothamGal: Thats why there is a certain financial advisor program that calls it an “I love debt score”.