On Jan. 29, 2009, a relatively quiet event took place that will shape the future credit opportunities for hundreds of millions of Americans. TransUnion, one of the three national credit reporting agencies, rolled out and made commercially available the credit scoring model referred to as “FICO 08.” FICO 08, which will actually be called the FICO Risk Score Classic 08 by TransUnion, is the newest in the long line of FICO credit score redevelopments. Think of it as a newer version of Microsoft Windows; it does basically the same things as the older version but has some new bells and whistles.
Since 1989 Fair Isaac has been partnered with credit bureaus to offer and sell FICO scores to lenders. Every few years they re-engineer and re-develop their credit scoring software, which is generally not a newsworthy event. So why all of a sudden are we talking about this newest version? Consumers and the media have effectively ignored every other redevelopment since 1989. Why is this one so special? Here’s why:
2. FICO 08 will ignore collections and public record items that have an original balance of less than $100. This means that Fair Isaac concluded in their research that very low dollar collections and public records no longer are synonymous with poor credit risk to the extent that they were in the past. So, for those of you who never got your final cable bill and had to suffer through a ridiculous $79 collection for seven years, you’ve been vindicated. Actually, the lending industry has long considered low dollar collections to not be terribly important.
3. Consumers with high credit card utilization percentages will be penalized more in FICO 08 than in previous versions of the score. This means Fair Isaac’s research has concluded that consumers who have balances that are too close to their credit limits pose a greater credit risk than they did in the past, hence the more severe treatment. Pay down your cards as soon as you can.
So what does this mean for you? Your score will be different with the new model, that’s a certainty. The question is whether it will be higher or lower. If you’re a good credit risk then your score will be higher. If you’re a poor credit risk then your score will be lower. And those of you who have been banging your heads against the wall because of that silly $79 Dominos Pizza collection on your credit reports, things are looking up.
John Ulzheimer is a nationally recognized credit expert, president of Consumer Education for and contributor to On The Money. Learn more about him at CreditExpertWitness.com.