Sunday, October 16, 2011

The New Credit Score - Help or Hurt

Many consumers have been plagued with the never ending changing rules for calculating credit scores, it seems as soon as consumers understand the system it changes. Once again the FICO company is changing the credit score rules.

Due to the recession or one small transaction many consumers are on the line between good and bad credit, one small slip up could plunge their score in the bad credit zone, one debt payoff could boost their score to good credit and save them in interest and fees.

The new FICO8 credit score can potentially help consumers obtain higher credit scores or lower scores for others, some consumers score will not be affected at all. The FICO score ranges from 300-850, 850 being the highest score. FICO updates its scoring model every 2-3 years.

FICO claims the new scoring model is more precise because it considers more types of consumers. FICO8 rates people who have missed payments on small debts under $100 easier which could help millions of consumers improve their credit scores. These types of accounts will not have the same impact as a missed mortgage or credit card payment. The FICO 8 considers people with high credit utilization rates (credit card balances) to be higher risks than under the previous FICO model.

Major lenders have been slow to switch to the new scoring model. Three years after the actual release, most major lenders still have yet to adopt it and is absent in the mortgage industry.

In June 2011, Citibank implemented the new FICO8 credit scoring model. Bank of America is in the process of implementing the FICO8 scoring model. Fannie Mae and Freddie Mac continue to use the older FICO credit scoring model.

Almost half of consumers have FICO8 scores that are close to their scores from the previous version of the FICO score. The main ways to maintain a good credit score under the FICO8 model are: pay your bills on time, keep credit card balances low, and open a new credit account only when you need it.

The FICO8 will look at high credit card balances differently and maxed out credit cards will lower credit scores more. Isolated late payments will weigh less heavily on your credit score. Multiple late payments will weigh more and decrease your credit score. Authorized credit card accounts will be included when calculating your credit score. The FICO8 score will ignore collection accounts with balances less than $100. The five major actions that can greatly lower your credit score are: maxed out credit cards, foreclosure, bankruptcy, 30 day or more late payments, debt settlement or loan modification.

FICO says the new score will help consumers. We will just have to wait and see.

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