The credit scoring system is being tweaked again as Fair Isaac Corporation,
developer of the FICO credit score rolls out a new model dubbed FICO
The new product was originally announced back in June but was not due to be
finalized for a while. A demand by users in the wake of both rising mortgage
defaults and consumer credit delinquencies for a better way of analyzing
risk has pushed FICO into speeding up the release. It is expected that
FICO 08 will begin to roll out by late spring.
Last year the three major credit bureaus announced credit score packages of
their own, probably having seen the success FICO was having in charging consumers
for information on their credit scores. FICO, however, remains the product used
by most lenders not only to grant credit but to set interest rates and other
loan terms. FICO scores are also factored into credit decisions by insurance
underwriters, cell phone, and utility companies and are sometimes used by employers
to evaluate prospective employees.
FICO predicts that the new scoring system
will help lenders
reduce default rates on consumer loans between 5 and 15 percent. FICO 08 will
supposedly go easier on consumers who make the occasional slip while coming
down harder on those with multiple offenses. For example, it will give a slightly
higher score than previously to a borrower who is late on one obligation but
current on multiple other accounts. Those with several delinquent accounts could
find their credit score has dropped.
Scores will still range from 300 to 850 and will take into account
the same factors as the old version such as timely payment history, length of
credit history, amount of debt, ratio of debt to available credit, type of debt
(credit cards good, finance companies not so good), and any excessive amount
of recent new credit. There will also be a premium placed on the debt mix; that
is a consumer with revolving and installment credit will fare better than one
with nothing but (revolving) credit card debt.
Among the big changes FICO is in the area of evaluating "authorized users."
An authorized user is one who is not responsible for paying a credit card, but
that card's history is reported on the user's credit as well as
on the owner's credit. Parents have for years made children authorized
users of their cards in order to help them build credit and many spouses derive
all of their credit histories from being authorized users of their husband's
or wife's card.
This form of credit improvement, commonly called "piggy-backing,"
however, became an article of commerce. As we reported in June, a whole industry
had grown up to broker improved credit through authorized user status. Credit
card owners with healthy FICO scores could make significant income by renting
authorized user status to those seeking to improve their scores. The broker
would manage the rental transaction (in which the renter would never have access
to the actual account) paying the owner a fee of perhaps $150. Since the transaction
has an almost immediate effect on the renters score the broker can fairly quickly
remove that name from the account and recycle it to another renter, generating
another $150 for the owner. The new credit information remains on the first
renter's credit report forever.
Lenders became alarmed about this practice as it seemed to undermine their
attempts to contain risk so FICO 08 will eliminate any impact
of being an authorized user. This will not only affect the authorized user for
a fee but also the college student hoping to build his credit on the foundation
of his parents'.
A number of websites have sprung up in an effort to prevent FICO from implementing
FICO 08 but most of the complaints are those that have long
been leveled against credit scoring and credit reporting agencies. Critics have
long questioned whether scores are valid measures of risk, complained about
a lack of transparency about how scores are calculated, and postulated that
minorities are unfairly penalized by the systems. The new version of FICO has
prompted anger over the elimination of the authorized user category claiming
that it will unduly penalize women who are more likely to have that status on
their husbands' card than vice versa.
One website recommends that authorized users of spouses accounts open a few
new ones either jointly with the spouse or in their own names and advises persons
who are about to be married to retain their own credit cards even as they are
added as an authorized user to the spouses credit lines.