New credit scoring formula rolls out

In the old days, if you paid cash for everything and carried no debt, you were considered a great prospect for a mortgage or car loan. Fast forward a few decades and the rules have changed considerably.

Today, your ability to borrow is largely determined by your credit score, a three-digit number lenders use to calculate how likely you are to repay debt.

A new version of FICO, the most widely used credit-scoring formula, has begun rolling out. FICO is named for Fair Isaac Corporation, whose proprietary software is used by the three leading credit bureaus. Under the new version, FICO 08, weighting factors used to determine scores will change as lenders gradually adopt the new system.

FICO Public Relations Director Craig Watts explains, "As consumers' credit habits change, we adjust our scoring formula to more accurately reflect information found credit bureau records."

A few FICO 08 highlights:

• It continues to grade scores from a low of 300 up to 850 for stellar credit risks.
• Unpaid collections, judgments and tax liens where the original debt is under $100 (like small library fines, parking tickets or medical bills) are no longer factored in so they won't ding your credit score.
• One-time credit setbacks, like a charge-off or car repossession, won't impact your credit as seriously, provided your other accounts remain in good standing. However, persistent late payments likely will be penalized more heavily.
• FICO 08 still factors in a certain amount of "authorized user" activity (adding a spouse or child to an account to make credit conveniently available). However, you can no longer pay a credit repair agency to "piggyback" on a stranger's strong credit record to improve your own score.
• FICO 08 is more sensitive to how much of your available credit you use; so if your lender lowers your credit limit, you might suddenly be tapping a higher percentage of available credit and be penalized.

If you maintain credit cards you seldom use, lenders may adjust their credit limits or close them altogether, thereby lowering your overall available credit – and possibly, your credit score. One strategy: Make occasional small charges on these cards so lenders will be less inclined to close the accounts. Just be sure to pay off balances each month, otherwise you'll defeat the whole purpose.

Because not all credit bureaus (and thus, their lender clients) are adopting FICO 08 at the same time, it may not always be apparent which factors are being used to assess your creditworthiness. However the following guidelines will always help you maintain a sound credit score:

• Stay well below your overall and individual credit card limits.
• Never exceed credit limits or make late payments – that could damage your credit score and result in greatly increased interest rates.
• Carefully review your credit reports. You can order one free report annually from each of the three major credit bureaus at www.annualcreditreport.com. Look for errors and fraud that could lower your score.
• You can also estimate your score using the free FICO Score Estimator at What's My Score, a financial literacy program run by Visa (www.whatsmyscore.org/estimator.)

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