Just when you thought the credit score reporting process couldn’t get more confusing for consumers, some major changes have taken place in the last year with the rollout of the new FICO score model known as FICO 08.
I’ve always encouraged people to be proactive in addressing and fixing any credit challenges they may have—and that still applies. However, it’s more important than ever before to take a hands-on approach to your credit, and understanding how recent changes may affect your credit scores and is a key part of being proactive.
Here’s a summary of a blog from Linda Ferrari of Credit Resource Corp. The complete article and other great information regarding your credit is available on Linda’s blog at: http://lindaferrari.com
FICO 08 – The Algorithm Has Changed (Algorithms are the mathematical formulas used to calculate your credit score)
Beginning last year, Fair Isaac & Co. implemented changes in how FICO scores are computed, calling the new system FICO 08. The model replaces the existing FICO model, which has remained relatively unchanged since the 1980s.
Per Fair Isaac, here are the key changes in the new model:
Yes, Authorized User Accounts Still Work—But Only For Family!
One of the credit-repair tricks that became popular in recent years was paying thousands of dollars to be listed as an “authorized user” on the account of someone with good credit (usually a stranger), thereby improving your FICO scores enough to get into that home or auto loan immediately. That stops with FICO 08, and rightfully so – because this practice was an obvious form of fraud. Note: because alternative credit has almost become a thing of the past having enough credit lines established for at least two years can be the “make or break” in your loan approval.
Here’s the good news—the new model will still allow legitimate authorized users such as a spouse and/or family member. And I can tell you confidently that this credit building technique still works for spouses and children who have the same last name as the credit card owner. There have been two cases in the last 60 days where I have seen my clients’ credit scores jump 50-60 points after being added to their spouse’s credit card account.
As a true consumer advocate, my advice is to build your own credit first. To maximize the benefit of this option, you should make sure that the account you are being added to belongs to someone you trust, has NO
negative history reporting at all, has and keeps a balance under 30% of the limit and is at least 2-3 years old.
Here are some other changes that were incorporated into FICO 08:
Having just one big black mark on the credit report, like a repossession, will
matter less than it used to if the report demonstrates responsibility overall.
Collection accounts with balances less than $100 will not impact the credit score any longer.
Maxing out those credit cards will drag scores down even more than it used to FICO 08 increases the emphasis on having available credit.
Having a mix of credit is also more important in FICO 08. This means
consumers MUST have at least 1-2 active major credit card accounts.
As a credit score expert, the changes that I have seen in hundreds of credit reports are NOT representative of what consumers were led to believe a year ago when the new model was introduced. FICO said that the new model would have less impact on credit scores under certain circumstances, however, in my experience, the new model appears to be producing lower scores under almost every circumstance. Especially when it comes to credit card balances and late pays. So if you are one of those people who are out there wondering why credit scores have dropped in the past few months—even though nothing has changed, this could be why.
So what can you do?
1. Maximize. The most effective way to improve credit scores is by ensuring the information used to generate the score is accurate. You may also want to consider purchasing a copy of Linda’s book, The Big Score – Getting It & Keeping It – Buying Power
for Life, which is a comprehensive How-To Guide on how to maintain strong
credit reports and credit scores.
2. Keep Credit Card Balances As Low As Possible. Carrying balances over 50% of the credit card limits (PER CARD) was always something to avoid, but it can hurt you even more under the new FICO 08 model. Anything over 50% will decrease points on a credit score, and anything between 30% and 49% means your clients are just treading water. To improve your credit carry a balance under 30% of your credit limit.
Stay clear of the two extremes of closing accounts on the one hand
and opening accounts they don’t need on the other. And make sure that
all positive accounts and credit card limits are being reported to the three major credit bureaus, Equifax, Experian and TransUnion.
3. Paying Bills On Time. There are TWO important DON’Ts when it comes to late pays:
DON’T underestimate the effect that late pays have on credit scores.
DON’T overestimate the kindness of creditors to remove late pays just
because of a good payment history with them.
One 30-day late can cost 50-80 points immediately. Trust me on this—late pays are the most difficult derogatories to have removed from credit reports and they take at least 2 years to start significantly aging out.
The easiest way to make sure payments are made on time is to sign up for automatic withdrawal, if it’s available. If you don’t have the cash flow to do this, at the very least be sure to mail your payments 7-10 days before the due date (or pay online 3-5 days before the due date) to ensure payments are received and processed by the time they’re due.
Consider working with creditors to change monthly due dates to better fit within your budget.
In conclusion, I want to once again stress the importance of always being proactive.
Read about Linda’s new book, The Big Score – Getting It & Keeping It – Buying Power for Life.
Copyright – 2009 – LoanOfficerMagazine.com
Written By: Linda Ferrari
