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05/08/2008

FICO 08: How Will It Affect You?

Fair Isaac got a makeover. In that past year, you may have heard something about a new Fair Isaac Corporation (FICO) scoring system called FICO 08. The new model incorporates redefined scoring guidelines among other changes. When it will be implemented remains to be seen. If this is the first you've heard of FICO 08 or are unsure as to how it can affect you overall, keep reading this article to educate yourself on the ins and out of the next system that will determine your credit worthiness.

The Fair Isaac Corporation originally developed the FICO credit scoring system back in the 1950s to determine a person's credit worthiness. This score is based on factors including payment history, the number of credit cards a person has, the different types of credit used, and the amount owed on each card. The scoring model also takes into account how long a person has had credit cards in addition to the number of times credit has been applied for. Credit scores can range anywhere from 350 to 850, with the average American falling in the 600 to 700 range. It is this FICO credit score that many lenders use to determine if they are willing to give you a loan as well as the interest rates levied on any loan.

Under the new FICO 08 system, all of the above mentioned score guidelines will still be taken into consideration; however, there are some new changes that will have significant impact on credit scores across the country.

Probably the most notable change will be seen by those who are secondary card holders. Those people who have a credit card under a spouse's or parent's name will be affected. This was done to cut down on people with bad credit becoming authorized users of even a total stranger's card in order to reap the benefits of the cardholder's established credit. This means that if you have a card under another person, it will not be reflected in your credit score any longer.

Another big change for the better is that the new system will "go easier on people who make the occasional slip". As an example, if you make a late payment on one of your cards but are current on everything else, your credit score would not be impacted to the same extent as would've on the current FICO scoring model. On the reverse side however, if you are delinquent on multiple accounts, FICO 08 will be much harsher with your score.

The final change with the new FICO 08 system is that it takes a person's variety of credit into consideration. So if you have a car loan, mortgage, a department store card and a major credit card where you are making your payments on time without difficulty, your credit score will be higher than someone with the same type of credit.

There is a downside to this as well. Even if a person has multiple types of credit, if a majority of the credit is used, the new system will knock points off the score.

So now that you understand what the new FICO 08 system is all about, you are probably wondering when it is going to affect you. According to a statement by the Fair Isaac Corporation last July, it was expected that the newer model for credit scoring would be implemented by one of the major credit reporting agencies as of last fall. However, due to internal problems, this did not happen. The new projected date is sometime in the middle of May of 2008. There will be no warning or notice as to when it is put into action. It will be up to you to make sure to check your credit score to see how the new FICO 08 system affects it.

Don't panic if you think your credit score is going to be greatly affected by the new system. There are a few things that you can do to protect your credit score from completely dropping. First, if you are a secondary holder of a card, either convert the account to a joint account or open up your own line of credit. This will ensure that your credit history is accounted for.

Second, only spend on credit what you can easily afford to pay off. Never max out a credit card or line of credit. You will want to show that you can manage your credit accounts easily and pay them off without difficulty. Thirdly, always pay your loans and credit bills on time. Under the new system, you will be heavily penalized if you miss payments or are late. Take your credit score seriously. If you don't, it will affect your ability to make large purchases (such as a car or house) more difficult in the future.

Julianne Alzamora has 7 years of experience as a freelance writer. Her articles can be seen in several financial websites about investing, investment strategy, personal finance and topics on real estate.





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