FICO, the company formerly known as Fair Isaac, developed the famous FICO credit score, which is used by lenders across the country to assess the creditworthiness of borrowers. The company has recently released a new method for calculating credit scores, called FICO 08.
Equifax, TransUnion and Experian, the three major credit bureaus have already adopted FICO 08. Not all lenders have adopted the model yet but it has been accepted by about 400 major lenders. Many banks, credit unions, credit-card issuers and auto lenders are moving towards adopting FICO 08. But the traditional method is still being used for mortgages, as Freddie Mac and Fannie Mae have not given the nod to FICO 08 yet.
An important change in FICO 08 is that it overlooks a serious delinquency if you have many other accounts that are in a good shape. If the delinquency occurred a few years back and you have a good credit record otherwise, then you need not worry. But if you have multiple serious delinquencies then your credit score will drop sharply. This will protect sincere borrowers who make only occasional mistakes, and penalize habitual offenders.
Moreover, missed payments of less than $100 would not affect the credit score. This is because it has been realized that a small mistake does not determine the creditworthiness of a borrower.
Under the new system, people who were piggybacking to improve their scores would not be able to do so anymore. Piggybacking distorts the actual creditworthiness of a person and amounts to misrepresentation. In such schemes, a person could pay and become an authorized user of a third party account. The account holder gets money for allowing the person to associate with the account. Due to the good health of the account, the person who buys the use of the account gets to improve his credit scores. FICO 08 will single out the people who have used dubious means to become authorized to use an account, and they would not be able to improve their credit scores.
FICO 08 will benefit people who pose a lesser risk to creditors and will be detrimental to people who pose a higher risk, thus making the credit score more accurate. You can take various measures to improve your credit scores under both FICO and FICO 08 by making payments on time, keeping credit low, and limiting the number of credit cards you have.
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