PERSONAL FINANCE
Change could aid credit scores
Published: September 06, 2009, 12:30 am
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Even the most responsible borrowers slip up sometimes.
Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or, perhaps there are unpaid library fines or parking tickets in collections that are hanging onto your credit history and affecting your FICO credit score, which is widely used by lenders to evaluate your ability to repay a debt.
With the newest version of the FICO credit-scoring system, however, minor delinquencies are now overlooked in calculating creditworthiness.
Under the updated scoring model, called FICO 08, small, missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.
Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago — and if their credit history is otherwise unblemished, says FICO, formerly Fair Isaac Corp., which developed the FICO scoring system.
“There’s more flexibility with missing a payment,” said Careen Foster, director of global scoring product management for FICO. “If you have a more habitual pattern of paying accounts late . . . you’re more likely to get penalized for that.”
If a consumer’s credit usage is high, that will be more likely to hurt his or her score with FICO
08. But getting close to your credit-card limits — even if you always pay on time — is penalized in some way in every FICO score, not only the recent edition, Foster said.
The new system has been available at all three credit bureaus — Experian, TransUnion and Equifax — since last month.
The changes were made to provide lenders with a better risk assessment of borrowers, said John Ulzheimer, president of consumer education for Credit. com, a consumer education and advocacy site. FICO decided that one small library fine didn’t really predict whether a consumer was likely to default.
With the changes, individuals who pose a low credit risk will probably see their scores rise a bit, and those who are high risk could see their scores drop.
FICO 08 also addresses “piggybacking,” a practice used by credit-repair firms to help people improve their scores, he said.
In piggybacking, an individual pays to become an authorized user on a stranger’s account. The account holder gets paid for allowing the person to be associated with the account, and the new authorized user is able to improve his or her credit score.
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