FICO Credit Score: New Scoring System Helps Some Borrowers

FICO credit scores mean everything to anyone applying for a loan.  The company behind FICO plans a new way to calculate the score for some in 2019.

Whether it’s a credit card, a car loan or a mortgage chances are the lender looks at your FICO score to figure out whether you qualify for the loan.  Mortgage companies and others also set your interest rate based on a FICO score.

So what’s new?

What do FICO credit score numbers mean?

FICO, a private company, scores people’s credit rating on a scale from 350 to 800. The higher your FICO score, the better your credit and the higher likelihood you will get the loan you want.  Credit applicants scoring 750 or higher are considered to have excellent credit.  Those ranking below 600 are considered to have poor credit

The FICO score represents a major hallmark for anyone trying to borrow money for a car, a home or anything else.

What is FICO?

FICO, contrary to what the acronym might suggest, has nothing to do with the federal government or any other level of government.  The credit rating is created by a company known as Fair Isaac Corp., and their stock market symbol is FICO.

Typically FICO score numbers come through a formula based largely on a borrower’s credit history.  Credit report data gets crunched in the special formula resulting in your FICO score.

What are the 5 factors behind the standard FICO score?

The traditional FICO score draws its base from five key factors lurking in a borrower’s credit reports:

• Payment history (35% of the FICO score)
• Debt/amounts owed (30%)
• Age of credit history (15%)
• New credit/inquiries (10%)
• Mix of accounts/types of credit (10%)

But if the final number derived from those factors is not the best, the Fair Isaac Corp in early 2019 plans to roll out another option.

Ultra FICO Score

If an applicant’s traditional credit history fails to make the grade, the lender under the new option can offer to have the score recalculated.  If the applicant opts in to what’s called the Ultra FICO Score the new number will reflect more about how the person manages money.

The consumer can allow the lender to look into checking & savings accounts as well as money market accounts and the Ultra FICO Score will be based on factors including:

• Whether or not accounts have been overdrawn
• Whether checks have bounced
• Evidence of saving money
• Cash management practices
• Timely payment of bills including utilities & rent not usually reported to credit agencies

The new score boosts the numbers for people who pay bills on time and keep money in their bank accounts.  Good money management means borrowers may be able to overcome a bad history with credit cards.  That sparked the idea behind the new score.

What is Behind Ultra FICO

Lenders acted cautiously after the U.S. economy tanked in 2008 when it came to setting up new credit accounts.   Slow paying accounts and defaults plague the industry.  On the other hand credit companies make bundles on lending their money and collecting up to 24.99 per cent from credit users.

Credit card companies and other lenders wanted another way to approve credit worthy borrowers whose traditional credit ratings weren’t pristine.  So if the standard FICO score weeds out too many people, there was pressure to come up with an additional screening formula.  The new score offers an optional look into additional information.  The additional data is fed into the system for a credit rating recalculation.

“Would-be borrowers with at least several hundred dollars in their accounts, who have had the accounts for a while and who transact frequently and don’t overdraw are likely to see their scores rise, FICO said.”

The Wall Street Journal, October 21, 2018.

Backers hope to help would-be borrowers.  At the same time they admit that some credit scores may decrease with the new information.

FICO Scores: What do the Numbers Mean?

Truth be told, FICO uses several scores.  The most popular among lenders ranges from 300 to 850.  The higher the number the better your credit:

Excellent         720-850

Good                690 – 719

Average           630 – 689

Poor                 Under 630

How important is your FICO score?  In 2013 lenders bought over 10 billion FICO scores on potential borrowers.  Some 30 million U.S. consumers looked up their own scores the same year according to the National Mortgage News.  Anyone who ever applied for any type of loan or credit knows “they’re watching you.”

Good Credit – Bad Credit

As a lawyer handling bankruptcies I hear most potential bankruptcy filers express great concern over their credit rating. The number is almost like the clothes one wears or the car one drives in that it creates an image to the outside world.  In another article I’ve given tips on how to rebuild credit after filing a chapter 7 or 13 bankruptcy.

One of the top things people can do to rebuild their credit rating, with or without a bankruptcy, requires making regular timely payments on easily affordable items.  This would include a modest car.  No one whose top priority is building credit needs the supersized SUV or a flashy sports car.

Throw out all the credit card applications you receive in the mail, whether it’s snail mail, email or otherwise.  Read the fine print and you’ll discover those willing to extend credit soon after a bankruptcy extort what I consider to be obscene interest rates.  The rates sometimes tower up to 24.99 and even 27.99 percent and used to be caller usurious.

FICO – Your Credit Rating

So the newer formula for figuring your credit rating may help those who have bad credit under the traditional score.  But this depends on whether or not their financial habits in other areas measure up.   Paying non credit card bills on time, maintaining balances in bank accounts and never overdrawing accounts appear to be habits that push the new numbers.

Attorney Andrew D. Myers practices law in both New Hampshire and Massachusetts, with offices in Derry, NH and North Andover, MA.  Services include filing of consumer bankruptcies including Chapter 7 and Chapter 13.

Sources:

Here’s How the New Ultra FICO Credit Score Will Work, Alicia Adamczyk, twocents.lifehacker.com, October 22, 2018.

Why Your FICO Score Could Get a Boost in 2019, AnnaMaria Andriotis, The Wall Street Journal, October 21, 2018.

Note: FICO is a registered trademark held by Fair Isaac Corp.

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