How Will the New FICO Formula Affect Youby Tim Manni
For any consumer out there who hasn’t visited financial experts Ken and Daria Dolan’s website — www.Dolans.com — you’re missing out. Just today we found out that Fair Issac, the company which developed the FICO score, has changed the formula for how your credit score is calculated.
Dubbed “FICO 08,” the new formula, which ranges from 300-850 points, is designed to do a better job at detecting future defaults. Here are some ways the new FICO formula will affect you:
- Late-Payment Leeway: I can hear you cheering through the computer. According to the Dolans, “With FICO 08, however, an isolated late payment affects your score less than it does now, provided that your other bills are paid on time.”
- Small Collection Accounts Ignored: “FICO 08 will ignore collection accounts where the original balance is less than $100. That doesn’t mean you shouldn’t pay those accounts, of course, but it does mean they shouldn’t hurt your credit scores.”
- Debt Is a Good Thing: Sorry, but if you’re proud of the fact that you live debt free, I regret to inform you that FICO 08 doesn’t share your sense of pride. If you don’t “have a car loan or mortgage, and you rarely use credit cards, you may see your FICO score drop because FICO 08 places an even greater emphasis on a solid mix of credit types.”
- Lower Your Balance/Credit Limit Ratio: Some credit experts will advise consumers to keep a credit card balance between 30-50% of their available credit. Under the new formula, the Dolans say it’s best to keep your ratio down at around 10%.
When all is said and done, the Dolans predict a majority of consumers will see their credit scores rise.
Gregory Karp of the Allentown Morning Call writes “It’s difficult to determine when and if lenders will start widely using FICO 08. Only one of the three major credit bureaus, TransUnion, is offering a FICO 08 score to lenders, [Credit.com's President of consumer education John] Ulzheimer said.”
Click here to read the Dolan’s complete list of “Things You Must Know About the New FICO Scores.”