Resurrection of Credit Scoring Model FICO 8

As you may have heard, the FICO 8 credit score debuted in 2009 as the newest generation of the FICO credit score. However, it has taken more than a year for banks and other financial services providers to really adopt the FICO 8 updates.

What is FICO 8?

It is true that the FICO score contains five major factors that affect your credit score. These factors arepayment history, credit utilization, length of history, types of credit used and new credit opened. However, within each of these five categories are little tweaks that can affect your credit score. FICO works to make adjustments in an attempt to more accurately apply its credit scoring model.

Changes to the Scoring System

FICO 8 is one of the latest versions of the scoring model. There are four main results of FICO 8:

1. High credit utilization: FICO 8 weighs the amount of credit you are using, in comparison with how much is available, more than it used to in the previous model. This means if you are close to maxing out your credit cards, it will matter more now than it did in the past.

2. Authorized users: A couple years back, FICO toyed with the idea of not counting authorized users. However, there was an outcry against this, since being an “authorized user” on an account can be helpful to spouses and children (usually students) looking to build credit. FICO 8 continues this practice of considering authorized users.

3. Isolated late payments: In the past, it used to be that a single late payment could cause significant damage to your credit score. FICO 8, though, takes into account the fact that sometimes mistakes happen with even the most responsible of us. The new algorithm takes into account the number of late payments you have, and while you are still dinged for an isolated event, the impact shouldn’t be as great as it was before.

4. Small balances: Many borrowers will like this next change. FICO 8 no longer pays attention to collections items with a balance that was originally less than $100. That means that a small bill you forgot to pay won’t ding your credit score the way it used to.

There are other smaller changes and improvements to FICO 8, but they do not have as big an impact. It is important to note that credit rating agencies give different names to the FICO 8 score.

At TransUnion, it is known as Classic 08 or FICO Risk Score, Experian calls it theExperian/FICO Risk Model v08, and Equifax refers to it as BEACON 09. It is important to note that the credit agencies have their own credit scores, and their own variations of FICO scores. Additionally, many lenders have their own tweaks to the FICO 8 scoring model, so what is actually used to evaluate your credit worthiness may not be exactly the same from organization to organization.

When Will Banks and Lenders Start Using It

For the most part, banks and lenders are sticking with the older FICO scoring model for the time being. Citi has adopted FICO 8 as its scoring model, and Bank of America is considering it. But FICO 8 is not yet being used in the mortgage industry. Most significantly, Fannie Mae and Freddie Mac, the government-sponsored entities that buy, sell, and insure most mortgages currently written, still use various versions of FICO Classic.

Why Does FICO 8 Matter to Me?

The goal of any credit scoring model is to gauge your potential risk of default. If you have a high credit score, it means you have a good credit reputation and are unlikely to default on the loan. A lower score, though, indicates the lender could be taking a risk in loaning you money.

Credit scoring attempts to take your credit behaviors of the past and summarize them into a number that others can use–at a glance–to determine what sort of financial risk you present. FICO 8 hopes to better pinpoint your behaviors with a number by changing the weight it gives to different factors, and including more subtle methods items in its scoring.