A New FICO Scoring Model

If you’re working to improve your credit, listen up. Fair Isaac Corp., creators of the FICO credit score, announced a new scoring model expected to take effect this spring. The model, named FICO ’08, provides a more precise way for lenders to determine a borrower’s creditworthiness. One major change is that FICO scores will now exclude authorized user accounts, also known as “piggyback credit,” from the scoring formula, says Craig Watts, public relations manager at Fair Isaac. This is partly a response to broker or credit card owners with good credit scores forming rental agreements with consumers seeking to improve their credit, charging fees as high as $2,000 for authorized user status.

Emily Davidson, an expert at Credit.com, a credit information Website, says teenage borrowers will be hit the hardest. “Many young people have authorized user accounts because their parents wanted to help them establish credit. But once the new model is in place, authorized users without a credit history of their own will not have a credit score.”

In cases where an authorized account is the first type of account a borrower obtained, not including it can shorten the credit history, resulting in a lower score. Length of credit history accounts for 15% of one’s total score and payment history accounts for 35%. According to Fair Isaac, 30% of the population has an authorized user account on their credit report, and 60 million to 75 million borrowers will be affected by the change. As an alternative, Davidson suggests becoming a joint cardholder, where each person is equally responsible for the payments and outstanding balance.

Another change is that more points will be given to borrowers with several credit types, such as student loans, credit cards, and a mortgage, because it demonstrates they can manage payments on various types of loans. Delinquencies will be handled differently. “Under the current version of the FICO score, if a person has one delinquent account, they’ll get lumped together with people who have more than one delinquent account,” Watts says. “But the new model separates [these] people from those who have multiple delinquencies.” One thing that won’t change is the scoring range. It will remain 300 to 850.

Your credit score will decrease if:
The only credit you have is an authorized user account.
You are near the limit on several credit cards.

Your credit score will increase if:
You have multiple types of credit, such as a student loan, credit cards, and a mortgage.
You have several accounts in good standing.