How Will FICO 08 Affect Your Credit Score?

By Katelyn Hayes   

 

Fico credit score rating.

If you thought you had a handle on how credit scores are calculated, it's time for a refresher course, because Fair Isaac — the company that created the FICO® credit score, which is the basis for most consumer credit scores — is changing up their credit-scoring formula. While the traditional FICO rating scale remains intact (ranging from a low of 300 to a high of 850), Fair Isaac is adjusting the weight that certain factors have over others when determining those scores. Fair Isaac believes this move will improve overall credit-scoring accuracy by up to 15 percent.1 And the higher your credit score, the better your opportunity to secure new credit lines and negotiate low interest rates.

As with most major changes in life, the new system comes with both good and bad side effects. While the new system is designed to be more forgiving of minor credit slips, it will be more detrimental to serious credit offenders' scores.

How FICO 08 can help consumer credit scores

  • "Authorized user" status makes a return. In recent years, FICO had kept authorized users from applying the primary credit cardholder's revolving debt history towards improving their own scores. FICO 08 will again permit this practice, which can help authorized users build their credit history.

    Fair Isaac believes it's found a way to distinguish legitimate authorized users from false ones, who, aided by shady credit repair companies, tried to improve their score by piggybacking on a stranger's established good credit.
  • Credit inquiries hurt less. Under the old system, too many inquiries in your report — including your own efforts to obtain new credit lines — lowered your score. This is no longer true for FICO 08.2
  • Minor issues have minimal effect. FICO 08 is more forgiving of credit oversights that are under $100. One missed bill or a forgotten library fine, even if sent to a collection agency, won't leave a negative mark on your credit history.

    Also, a single severe (90-day) delinquency won't negatively affect your score under FICO 08 if all other accounts are in good standing.

How FICO 08 can harm consumer credit scores

  • Habitual offenders beware. While a single mistake hurts less under the new system, someone with several delinquencies will suffer harsher punishments than before.
  • High credit card balances hurt more. FICO 08 will factor the balances you carry more heavily than before. A higher balance translates to a lower score.
  • You need to use the credit cards you have. Closing accounts or letting credit cards lie dormant will negatively impact your credit score, as will failing to utilize the amount of credit you have available to you.3

    While available credit always factored into your score, it counts even more under the new system. This development could adversely affect many consumer scores, since credit companies are actively slashing credit lines for many customers.

How FICO 08 can help or harm you, depending on your starting point

  • Credit variety means more. Consumers who have a mix of revolving credit (like credit cards) and installment accounts (like car loans) will be rewarded more points under FICO 08. But if your account is currently lacking that diversity, your score could take a hit — and the lowered score will make it harder for you to obtain the new credit lines you'll need to gain variety and raise your score.
  • Overall history counts more. A lone blight on your credit report — like a bankruptcy or repossession — won't completely tank your credit score anymore. However, the length of your history could hurt you if you have a "young" or "thin" account or payment history, as will multiple payment delinquencies over 90 days late.3

Footnotes

1 "FICO 08 score delivers predictive boost where lenders need it most," FairIsaac.com

2 "Fair Isaac Announces Changes to its Credit Scoring Formula," CreditInfoCenter.com, June 6, 2008

3 "What the New Scoring Model Means to Students," StudentPlatinum.com