Potential FICO Score Changes That May Affect Your Credit | The Frugalista

Potential FICO Score Changes That May Affect Your Credit

by frugalista on April 28, 2015

Credit ReportHey Frugs! Your FICO score determines whether you are allowed to roam the earth for free. Just jokes. Kinda. Your FICO score is a big deal, and that’s why I run posts on how to clean up your credit. It determines your credit score. The higher the score the better. High scores allow you access to the best loan interest rates. A low score may stop you from getting a job, apartment or car insurance. There are some potential changes in how the FICO score is being calculated, so I asked my friends at NextAdvisor.com to answer some questions for TheFrugalista.com! Thank you Jonathan Roisman, a writer on the credit monitoring beat for NextAdvisor.com, for the Q&A.

Everything You Wanted to Know about the Proposed New FICO Formula

What is a FICO score?

Your FICO scores are mathematical models used to determine your creditworthiness – or how likely you are to repay a loan. They are determined by five factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit accounts (10%) and types of credit in use (10%). You have three separate FICO scores, one from each of the major credit bureaus: Equifax, Experian and TransUnion. Your scores are usually slightly different with each bureau, and sometimes there can be major discrepancies because not all credit inquiries are placed on all three bureaus. For example, when you apply for a credit card, the bank might only notify two of the bureaus, which alter your scores for only those two bureaus. FICO claims about 90% of top lenders use your FICO scores, which is why it’s important to know your FICO scores. The scoring system ranges from 300 to 850.

Why is there a potential change with the FICO formulation?

The change is currently in the pilot program and hasn’t yet been fully implemented. The new FICO score is being calculated by Equifax and LexisNexis and will focus on repayment on items not currently calculated in your regular FICO scores. These items include things like repayment of cell phone, cable and utility bills. The individual can’t see their score, and it will be used by a dozen major credit card issuers to determine whether to approve an application for someone with little or no traditional credit history.

Should people change any behaviors because of the formula change?

The formula change doesn’t affect the current FICO score model, but is rather an addition for those with no or damaged credit histories. People not impacted by the score update don’t have to change their behaviors at all, while people with bad or no credit history should be sure to pay their cell phone, cable and utility bills on time and in full whenever possible to improve their creditworthiness and chances of qualifying for a loan or credit card.

What are the most important parts of the FICO score change that people should know?

Instead of focusing on the five major factors listed above, the new score will be applied to those with no credit history and focus on the repayment of bills not currently used in the traditional system. As a result of this, close to 15 million Americans might have the opportunity to qualify for a credit card they wouldn’t have been able to get in the past.

What should consumers expect now?

In theory, millions of people will have a better opportunity to apply for a credit card by showing lenders they have a good history of paying their regular bills on time. For those who have a long credit history or who already have a number of credit cards or other loans, this won’t impact them at all.

Will this change help me save money or will it cost me money? Does it depend?

The change allows more people to apply for credit cards, which can be a blessing or a curse depending how responsible you are with credit. If you were locked out of the credit card game because you didn’t have any history, this is a great opportunity to get a card and rebuild your creditworthiness. However, if someone’s not good at paying their bills on time or in full, this can be a potential disaster because the banks are essentially letting millions of people with no real track record get new lines of credit. It just depends how these qualifying individuals use it.

About Jonathan:
Jonathan is a NextAdvisor.com Writer who covers credit monitoring, credit cards, savings accounts, web hosting, tax services, auto insurance, audiobooks and online meeting software.

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