Credit-scoring system is about to undergo change
In September, the FICO credit-scoring system is set to undergo a major overhaul. Fair Isaac Corp., the Minneapolis company that creates the formula used to calculate the score, is downplaying the change, saying that it won't have much of an effect.
But 40 of the top 50 financial institutions in the country rely on FICO scores to determine whether to approve a loan and what rate to charge. Retailers, landlords, insurance companies, employers and utilities also use it to decide how to do business with you -- or whether they should.
So any change in the way that scores are decided affects millions.
Because Fair Isaac doesn't want rivals to copy its formula, it isn't giving out too many details about the changes, but spokesman Chris Watts did say this: Fair Isaac divides the population into 10 segments based on credit history and applies a different formula to each. Eight segments include people with good credit, and two are for people with serious problems. 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. That could result in a slight change -- up or down -- in many scores.
"This new system will give lenders more dependable scores for those higher-risk consumers and those who have little history," Watts said.
Now, that's not really a bad thing if your credit is pretty good, but if you're on the margin or trying to establish your credit, it could mean trouble.
Because businesses interpret scores differently, a slight change could be the deciding factor in whether a landlord decides to rent to you or whether your bank decides to increase the interest rate on your mortgage or home-equity loan.
For example, according to Fair Isaac's Web site ( www.myfico.com), the difference between a score of 620 to 659 and one in the range of 660 to 699 can result in a $163 difference in the monthly payment on a 30-year mortgage.
Watts concedes that certain groups will feel the effect far more than others.
People with thin credit history or poor credit will likely see their score either jump or drop significantly, he said.
As it goes with most change, some people are going to be hurt through no fault of their own.
One adjustment to the current credit scoring system will be to stop giving credit points to those who are authorized users on someone else's credit card.
This change will affect about 30 percent of people with credit reports, or about 60 million consumers, said John Ulzheimer, president of educational services for Credit.com and a former manager with Equifax and Fair Isaac.
"When they close this loophole, it will eliminate millions of authorized users and their scores will go down," Ulzheimer said. "This is a very, very big deal."
This change is going to affect young adults trying to establish credit by attaching themselves to their parents' credit cards, spouses -- mostly women -- who are authorized users on the family credit card, and people who are trying to re-establish credit by coat-tailing a family member's good credit history.
Fair Isaac has closed this loophole because the lending industry has complained about abuses and said it was distorting borrowers' true credit risk.
So what can consumers do?
First, those who became authorized users to help build up credit should consider switching to a joint account. That will allow the joint member to continue to reap the benefits of the primary cardholders' strong credit history.
But this option poses more risks to the primary holder of the credit card.
For example, if an authorized user abuses the card, the primary cardholder simply has to make a phone call to revoke the user's card.
It's not as easy to remove a joint user. The primary cardholder would have to close the account and open a new one to remove the user from the account.
Most of these rules apply in determining ways to improve or maintain your credit score, Watts said.
BY ; VICKI LEE PARKER
VIa : www.star-telegram.com
But 40 of the top 50 financial institutions in the country rely on FICO scores to determine whether to approve a loan and what rate to charge. Retailers, landlords, insurance companies, employers and utilities also use it to decide how to do business with you -- or whether they should.
So any change in the way that scores are decided affects millions.
Because Fair Isaac doesn't want rivals to copy its formula, it isn't giving out too many details about the changes, but spokesman Chris Watts did say this: Fair Isaac divides the population into 10 segments based on credit history and applies a different formula to each. Eight segments include people with good credit, and two are for people with serious problems. 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. That could result in a slight change -- up or down -- in many scores.
"This new system will give lenders more dependable scores for those higher-risk consumers and those who have little history," Watts said.
Now, that's not really a bad thing if your credit is pretty good, but if you're on the margin or trying to establish your credit, it could mean trouble.
Because businesses interpret scores differently, a slight change could be the deciding factor in whether a landlord decides to rent to you or whether your bank decides to increase the interest rate on your mortgage or home-equity loan.
For example, according to Fair Isaac's Web site ( www.myfico.com), the difference between a score of 620 to 659 and one in the range of 660 to 699 can result in a $163 difference in the monthly payment on a 30-year mortgage.
Watts concedes that certain groups will feel the effect far more than others.
People with thin credit history or poor credit will likely see their score either jump or drop significantly, he said.
As it goes with most change, some people are going to be hurt through no fault of their own.
One adjustment to the current credit scoring system will be to stop giving credit points to those who are authorized users on someone else's credit card.
This change will affect about 30 percent of people with credit reports, or about 60 million consumers, said John Ulzheimer, president of educational services for Credit.com and a former manager with Equifax and Fair Isaac.
"When they close this loophole, it will eliminate millions of authorized users and their scores will go down," Ulzheimer said. "This is a very, very big deal."
This change is going to affect young adults trying to establish credit by attaching themselves to their parents' credit cards, spouses -- mostly women -- who are authorized users on the family credit card, and people who are trying to re-establish credit by coat-tailing a family member's good credit history.
Fair Isaac has closed this loophole because the lending industry has complained about abuses and said it was distorting borrowers' true credit risk.
So what can consumers do?
First, those who became authorized users to help build up credit should consider switching to a joint account. That will allow the joint member to continue to reap the benefits of the primary cardholders' strong credit history.
But this option poses more risks to the primary holder of the credit card.
For example, if an authorized user abuses the card, the primary cardholder simply has to make a phone call to revoke the user's card.
It's not as easy to remove a joint user. The primary cardholder would have to close the account and open a new one to remove the user from the account.
Most of these rules apply in determining ways to improve or maintain your credit score, Watts said.
BY ; VICKI LEE PARKER
VIa : www.star-telegram.com
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