A few years after it was first announced, FICO 08 is finally being used.  This updated version of the FICO score became available from TransUnion (TU), one of the three major credit bureaus.  The full name used by TU is FICO Risk Score Classic 08 and it has some major changes from previous FICO score models.

DIFFERENT CREDIT SCORE TYPES
As we talked about on January 21, 2009, most lenders in the U.S. use the FICO score model for their credit scoring needs.  The Fair Isaac Corporation, FICO, is the pioneer of consumer credit risk scores and continues to be the industry leader. 

Over the past several years, the credit reporting agencies, Equifax, Experian and TransUnion, who compile the consumer information, or reports, that the credit scores are based on, have developed their own scoring formulas to compete with the FICO score.  They even banded together to present a united front a few years back in creating the Vantage Score.  Why?  They probably make more money selling one of their own scores than having to go through FICO. 

They’ve done a great job with media advertising and catchy jingles to help consumers become aware of credit reports and credit scores.  What they don’t tell consumers is that purchasing their “consumer credit scores”, which are anything other than a true FICO score, really don’t give them a fair and equal comparison to what their lender sees when they review their credit.  Our experience in reviewing thousands of credit scores over the years is that the consumer scores are higher than the true FICOs, and people are often surprised and disappointed when they go to apply for a loan.

FICO 08 MAJOR CHANGES
1) NO MORE PIGGY-BACKING, this concerns the area of Authorized Users.
Historically, a spouse or relative would add someone to their credit card account as an Authorized User, (AU) allowing them to utilize the credit card and the account it was attached to.  The AU is not financially reponsible for the account.  However, it is reported on their credit file and any information about the account is reflected in the person’s credit rating.  So if the account went delinquent and had 30 day late payments reported to the bureaus, the AU suffered the negative impact.  Conversely, the AU could benefit with a higher credit score from being added to a long-time account in good standing with a low utilization ratio.

Some creative companies sprang up this decade offering to place someone with low credit scores onto an good-standing, revolving account that could potentially help their credit score jump significantly.  Of course, the hopeful AU had to pay big bucks for the privilege and the account holder could make quite a bit of money just for letting someone they didn’t know “borrow” their credit history for a while.  The abuse of the Authorized User strategy and its obvious attempt to mislead lenders caused Fair Isaacs to announce changes in the scoring formula regarding AU accounts.  Many lenders also changed their individual requirements and sometimes exclude AU accounts in their approval decisions.

The FICO 08 formula is supposed to recognize legitimate AU accounts, such as between spouses and/or children, and include those in the scores, while ignoring the illicit AU relationships and not including those accounts in the scores.

2) PENALTIES FOR HIGHER UTILIZATION RATIOS
Fair Isaac says their research concluded that people with credit card balances that are close to the account limit are at greater risk for default.  Therefore, FICO 08 penalizes consumers with high utilization ratios more than previous FICO score formulas did.  Keeping balances under 25% of the credit limit usually helps scores grow.

3) SMALL COLLECTION AMOUNTS ARE IGNORED
The research showed that very low dollar collections and public records such as judgments and liens do not equal a poor credit risk as much as they previously did.  FICO 08 will ignore collections and public records that have an original balance of less than $100.  It is best to not have any collections, however this is great news for anyone who has experienced a $75 medical collection they never knew about or that $20 library fine that was forgotton.

4) DON’T CLOSE ACCOUNTS
With FICO 08, you will get more points for having open accounts in good standing.  Having a higher proportion of closed accounts can hurt scores.  You can set up a small, monthly bill such as cable or the fitness club on a credit card to keep it active and open.  Just be sure to pay it off every month to save money on interest and avoid late payments.

WHAT IT MEANS
FICO 08 seems more in tune with the times and offers some much needed benefit to consumers.  Although the penalty for higher credit card balances will impact many consumers who find themselves using their credit cards to finance their lives during corporate down-sizing, reduced work hours or medical disability, other changes will help those that have generally good credit.

The big news is that TransUnion made it available.  However, it may be quite some time before companies pay to upgrade their current scoring formulas and get on board with the newest version and before it is available to consumers. 

You can get your TransUnion and Equifax reports and FICO scores here.  Good news, checking your own reports and scores doesn’t count against you.