New light was shed recently on the credit scoring standard known as FICO, or FICO 8, to use the upgraded methodology’s proper name.
Most credit consumers aren’t even aware that there was a shift in the most commonly used scoring system that started in 2009.
More consumers are becoming aware of FICO 8 thanks to a New York Times blog and an omission by FICO itself in a just-published study of Americans’ improving credit scores.
The percentage of U.S. consumers with FICO Scores between 800 and 850, the top range for credit worthiness, has reached a post-recession high not seen since October 2008, according to FICO Labs’ much published research.
Moreover, the percentage of consumers between 700 and 749 (15.5 percent) is the lowest that FICO has recorded since it began tracking this data in 2005.
The Times blog, however, made a valid point when it called out FICO for not mentioning that it was using its newer credit scoring system, FICO 8, rather than the initial FICO, as a basis for its findings. That would skew the study results somewhat since FICO 8 is a bit more forgiving in its rating of consumer credit habits.
For example, FICO 8 ignores small-dollar “nuisance” collection accounts, with original balances less than $100. It also is more lenient toward borrowers who have consistently solid credit, but may have had a rare late payment.
Rachel Bell, of FICO Labs, told the Times it did not matter that the report used FICO 8.
Individual credit scores might differ under the latest formula, she said, but the trend would be the same, even if an older scoring model were used, the Times blog said.
Consumers with solid credit histories would likely see their scores go up a bit with FICO 8, while those who are riskier might see their scores decline, Bell said.
The intent of FICO 8 is to better predict borrower risk.
Here’s an overview of FICO 8 from myfico.com:
High credit card usage
FICO 8 score is more sensitive to highly utilized credit cards. So if your credit report shows a high balance close to the card’s limit, your score will likely lose more points than it would have previously. You may want to consider keeping any monthly credit card balance low.
Isolated late payments
If a lender reports to the credit bureau that you were at least 30 days late with your payment, your FICO 8 score will likely lose points. If the late payment is an isolated event and your other accounts are in good standing, the FICO 8 score is more forgiving compared with scores from previous FICO formulas. However, if your credit report shows numerous late payments, the reverse is true and your FICO 8 score will likely lose more points.
Authorized user of credit card
Every generation of the FICO score formula has included authorized user credit card accounts when calculating a person’s score. FICO 8 score continues that policy. This can help people benefit from their shared management of a credit card account. It also helps lenders by providing scores that are based on a full snapshot of the consumer’s credit history.
To protect lenders and honest consumers, the FICO 8 formula substantially reduces any benefit of so-called tradeline renting. That’s a credit repair practice that entices consumers into being added to a stranger’s credit account in order to misrepresent their credit risk to lenders.
Small-balance collections accounts
FICO 8 score ignores small-dollar “nuisance” collection accounts in which the original balance was less than $100.