Wednesday, December 19, 2007
Your FICO Score is Changing in 2008
In order to reduce the potential risk of lending money to an individual, lenders evaluate the creditworthiness of
the borrower by looking at various variables which influence the likelyhood of a person's ability to pay back his or
her debt is a timely manner. These variables and statistics are then run through a mathematical model to arrive at
a number (score) that is called a credit score. This numerical credit score represents the creditworthiness of an
individual and is utilized by by all kinds of institutions like Banks, credit card companies, phone companies,
insurance companies etc. The Banks and lending institutions are of particular importance as credit scores are
used by them to determine who gets to borrow, how much and at what rate of interest.
A credit score named 'FICO' is a commonly heard credit score that is used by banks and other lending institutions
for mortgage lending. FICO is a trademark of Fair Isaac & Co. as this credit scoring system was developed by
them. In the United States and Canada FICO scores are available through the three major consumer reporting
agencies (also called credit bureaus) namely, Equifax, Experian and TransUnion. [US Tel Nos: Equifax (1-800-
685-1111), Trans Union (1
While there are other factors the key factors that can adversely effect your score are:
• Not having sufficient credit history of credit
• Late payments of bills
• Placed for collections with a collection agency for an upaid bill
• Having a large number of inquiries on your credit report
• Having high credit-card balances that are nearing your credit limit
• What goes in to your FICO score (With their relative weights):
o Payment History 35%
o Types of Credit Used 30%
o Amounts Owed 15%
o Length of Credit History 10%
o New Credit 10%
It was just announced by Fair Isaac & Co. that in 2008 your FICO scores are changing. FICO announced that it
will be tweaking its current model of calculating your credit scores using some new mathematics and statistical
models. The good news is that your current FICO score is anticipated to move up a bit when the new math models
are applied and your score recalculated for 2008.
The new provisions that are coming into force in 2008 now:
a) Stops authorized users from using your Card b) There are higher penalties for not paying your bills on-time c)
There are more rewards on your score for paying bills on-time d) There are additional points for carrying
different types of debt
This above translates in to the following:
a) If you are someone who does not have your own credit card and have been authorized by some one
else (like a parent or spouse) to use their card then it is time for you to apply for your own. Lenders want
to know you directly and want you to establish your own credit history. Also in the past authorizing
someone else to use your card has encouraged unnecessary scams and fraud that creditors (or lenders)
wish to curb.
b) It is imperative that you pay your bills on time as deliquency will now cause increased damages to your FICO-
score and timely payment will reap richer rewards to your score.
c) Having different kinds of debts like a mortgage, credit card debt, a student loan etc, now will now positively
impact your FICO-score.
Although carrying too many credit cards under the new calculations does not impact your credit score that much
it is nevertheless still recommended that you do not carry more than two or three credit cards. Carry the ones that
are have cash rewards or cash value. Specially during the holiday season stores lure you with significant discounts
on your initial purchase. They carry a significantly higher APRs and the history of these cards most of the time
sits unnecessarily for perpetuity on your credit history. So look beyond just the initial purchase from these cards.
If the initial offfer is too hard to resist then you may want to avail of the offer and subsequently have the card
cancelled. So Pick cards judicially and the ones that you will use.
If you are in the market for a mortgage then here is an example that should drive home the point of having a
good FICO-credit score that ends up in saving thousands of dollars in interest payments.
Based on a $200,000 mortgage, spread over 20 years the above table reflects how much you would be paying
each month with different FICO-Scores. The difference between the best and the worst is $125,000 in interest
payments over this period!
A FICO Score is your personal financial health barometer indicative of your credit risk- Score Well!