The Fair Isaac Corporation, best known for establishing the commonly accepted and used FICO credit score, is scheduled to debut a brand-new credit scoring formula in September. The change is expected to affect over 60 million consumers with established credit.
Carolina Newswire guest columnist, Pat Earnhardt, discussed the changes in extensive detail in her article on Tuesday. Earnhardt, a Mortgage Consultant and Senior Mortgage Banker for The Mortgage Rewards Team of Alera Financial, is more than an expert when it comes to the subject.
Here are the changes.
Change # 1: An end to credit boosts for authorized users on accounts:
Per Ms. Earnhardt,
“An end to credit boosts for authorized users on accounts — Fair Isaac estimates that about 30% of the 165 million consumers with enough information on their credit reports to have a credit score calculated have someone on their account as an authorized user. Authorized users on credit cards are not responsible for paying the balances but are approved to make purchases with the cards. Often, authorized users are family members of the actual cardholder, such as a college student on his/her parents' card or spouses who may have little or no credit of their own. With the old scoring model, coat tailing by authorized users could improve their credit score considerably if the primary cardholder kept balances low and paid the required monthly payments on time over a long period.”
For all of you college students out there who are listed as an authorized user on a parent’s credit card, you will have to find a new way to establish and improve your credit. This change in the new formula certainly would have been a blow to my credit score a few years ago.
Change # 2: Adding more population segments:
Per Ms. Earnhardt,
“Another major change is the addition of two more population segments. The theory at play with this segment change is that more population segments will make the scoring system more accurate overall, since the risk of putting someone in the wrong pool will be lower. In the past, FICO grouped consumers into 10 groups or consumer pools called population segments. These groups fell in pools — such as high-risk borrowers or borrowers with thin credit profiles, etc. Each group uses a slightly different version of the credit scoring formula.
Under the new system, the population will be divided into 12 segments: eight for people with good credit and four for people with bad credit. This increase in groups could result in a slight change of a consumer’s credit score either up or down. But even a slight movement of your score could have an impact on your interest rate or ability to be approved for a loan.”
Make no mistake about it; these changes could be extremely detrimental to your credit score. However, according to Ms. Earnhardt, there are two quick and easy steps that you can take in order to improve and protect your credit score under the new system.
1. Married couples: If you have an account(s) with your significant other as an authorized user, convert this to a Joint Credit Account.
2. Younger consumers: Apply for a secure credit card in your own name. Applying for a secured credit card is often the first step towards an illustrious career in the sport that is credit.
I would recommend forwarding Earnhardt’s article to any of your friends who will be affected by FICO’s new credit scoring formula. The public needs to be aware of the new formula and soon — September is just around the corner.
And for even more tips on how to improve your credit score and prepare for the new change in the FICO formula, click here.
By the way, for those of you who are wondering, Pat has no affiliation with the legendary Earnhardt racing family. Sorry to disappoint! But when it comes to mortgages, she is a strong contender in the chase for the CREDIT cup.
Also, I came across a related article on a new tactic that will help lenders mitigate authorized user abuse. TransUnion, one of the three major credit bureaus, recently "developed a customized approach that enables lenders to identify customers who may have added authorized user accounts to artificially inflate their credit report and standing." I strongly advise reading the article.
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