The way consumer credit scores are calculated will be changing soon.
In early spring, The Fair Isaac Corp. -- the creator of the FICO score -- will be unveiling a new scoring model for determining credit scores, dubbed FICO 08.
While the Fair Isaac Corp. is keeping its methodology for determining credit scores under wraps, the Better Business Bureau is offering a few details and advising consumers on how FICO 08 could affect them.
FICO scores -- which range from 300 to 850, with higher scores being better -- are based on consumers' credit histories and reveal their risk for defaulting on loans. A good credit score is anything higher than 700.
Average FICO scores for U.S. consumers are around 690. More than 90 percent of the 100 largest banks rely on FICO scores in determining who they will lend to, and at what rate.
"Not only can a low FICO score keep consumers from getting loans to buy a house or car, but many landlords, utility services and employers rely on the score as well," said Steve Cox, a spokesman for the BBB. "This means that a bad score can keep people from getting a good rate on insurance, an apartment, or even a job."
The Fair Isaac Corp. explains that the new method is more forgiving of minor slipups and will more accurately predict a borrower's risk of defaulting on loans. Fair Isaac Corp. predicts that more people will see their score increase than decrease.
FICO 08 will still take into consideration the same factors of a person's financial history, including indebtedness, length of credit history and number of open lines of credit. The difference with FICO 08 is the weight these factors will carry. The Fair Isaac Corp. said two people with the same score today could have different scores under FICO 08.
YOUR FICO SCORE MIGHT GO UP IF ...
You maintain various lines of credit, such as credit cards, a car loan and a home loan, because it demonstrates your ability to successfully manage different types of loans. You will also be penalized less if you are delinquent in one account, but are in good standing in others.
YOUR FICO SCORE MIGHT GO DOWN IF ...
You have many delinquent accounts. While a delinquent account has always had a negative effect on scores, people with more than one delinquent account may see their score slip even more.
BBB notes that piggybacking has become a popular way for people with no or bad credit to increase their credit score. Piggybacking involves being added as an authorized user to an account maintained by a person with good credit. Often, parents will make their child a joint user of their credit card, which helps the child build a credit history.
BBB is alerting consumers that the flip side of piggybacking is that credit-repair services have cropped up that allow and encourage people to essentially "sell" their good credit to people with poor credit by making them authorized users on their accounts.
In order to discourage this practice, when determining credit scores, FICO 08 will not consider accounts where the consumer is only an authorized user. Parents can still make their child an authorized user of a credit card, but the child's own FICO score will not be affected.
The BBB urges consumers to request a free credit report once every 12 months, and people can do so at www.annualcreditreport.com. Consumers can get a free report from the credit reporting companies Equifax, Experian and TransUnion.
For more information on FICO scores, visit www.bbb.org.
KELVIN COLLINS IS THE PRESIDENT AND CEO OF THE BETTER BUSINESS BUREAU OF CENTRAL GEORGIA & THE CSRA INC., WHICH SERVES 41 COUNTIES FROM AUGUSTA TO MACON. QUESTIONS OR COMPLAINTS ABOUT A COMPANY OR CHARITY SHOULD BE REFERRED TO (800) 763-4222 OR INFO@CSRA.BBB.ORG.