After years of tweaking, Fair Isaac Corp. finally rolled out its revamped FICO score method. Aside from your Social Security number, your FICO score is probably the most important number attached to you. It’s used by credit card companies and financial institutions to determine how likely you are to pay your bills on time – and whether they will extend you credit. Even worse, some employers use the numbers when making hiring decisions.
The scoring range is still the same, 300-850 (and the higher the number, the better). The new method is supposed to be a more accurate risk detector. But judging by the lingo from the Fair Isaac news release, it’s all about the bottom line for their clients – nine of the top 10 companies in the Fortune 500, two-thirds of the top 100 banks in the world, 90 of the 100 largest financial institutions in the U.S., and the 100 largest U.S. credit card issuers.
The “improvement will increase the ability of clients to reduce losses within current portfolios and to acquire more profitable prospects,” Fair Isaac says. Just who are those “profitable prospects?” My guess is they’re “revolvers,” a term used in the credit card industry to refer to the most profitable customers, those who carry monthly credit card debt.
It’s all about mitigating risk, and the “increased predictive power,” (sounds a little like Ms. Cleo, if you ask me) of the new formula apparently holds the power to do so.
As for consumers, this new system is supposed to be more forgiving to one-time slip-ups and impose stricter penalties on repeat offenders.
TransUnion is the first of the three credit reporting bureaus to implement the new scoring. “It’s more reflective of a person’s [financial] scenario,” says Lee Baker, a certified financial planner with Apex Financial.
The new system will also take a deeper look into credit histories.
“Now they’re going to look for patterns,” says Ivory Johnson, director of financial planning at Scarborough Capital Management. They’re also going to look at what type of payments you’re late on.” Johnson says reporting dings due to a late cable bill won’t weigh as heavily as that from, perhaps, a missed car payment.
Those with shorter credit histories may have to work a little harder to establish themselves. “For that younger person starting out, it may take a longer period of time to see where they can get credit on their own to purchase a car or home,” Baker says. But market conditions will also have some impact.
Let’s not forget about the market conditions of yore that fostered wanton spending with abysmal savings in the United States. The housing boom and subsequent bust that sent the economy reeling was spurred in part by poor assessment of borrowers risk, Johnson says. “If someone has four credit cards and is paying on time, how does that translate to ‘I can buy a house?’”
Don’t expect any changes just yet. The new criteria could take as long