Changes in Credit Scoring

Change in FICO Scoring System Could Affect Mortgage Loan Availability

Aug 13, 2007 -- Fair Isaac Corp. will make some major changes to the FICO scoring system. Those in the know call this overhaul a very big deal, one likely to result in plummeting credit scores.

FICO Facts

* The scheduled changes to the FICO system will affect 60 million consumers (30 percent of the credit report population).
* The FICO overhaul is most likely to impact the scores of young adults, women, and individuals trying to re-establish credit by piggybacking off another's card.
* Out of 50 top mortgage lenders in the U.S., 40 use FICO scores to determine loan eligibility and interest rates.
* Fair Isaac is changing the system in light of complaints about abuse from the lending industry.
Source: StopFICO.com

FICO 08
The new scoring model that Fair Isaac plans to roll out in September is known as FICO 08. Very few details have been released about the new scoring system - Fair Isaac does not publish much about their model for fear that someone will copy it - and as a result, most consumers are completely unaware that their credit scores could be in danger.

Fair Isaac spokesman Chris Watts has downplayed the changes, saying that the new system will be more dependable for lenders who are analyzing the scores of higher-risk consumers and those with little credit history.

Whether FICO 08 will really be more dependable for lenders is yet to be seen, but there is no doubt that it will have a huge impact on credit scores across the country.

Instead of dividing the population into 8 segments of good credit and 2 segments of bad credit, the new FICO model will divide the population into 12 segments-8 for good credit and 4 for bad.

For individuals who already have good credit, this change doesn't mean much. But for those trying to establish or re-establish credit, the new system may well cause problems.

Another huge change to the FICO scoring system involves the authorized user (AU).

Come September, being an AU on someone else's credit account will no longer be beneficial. An estimated 60 million consumers (most of them students or spouses) currently 'piggyback' on someone else's account as an authorized user. This means that they can use the account and share the benefits when the main account holder uses credit responsibly.

John Ulzheimer, current president of Credit.com and former manager at Fair Isaac, has gone on record as saying the AU change to the FICO system is a very, very big deal, because it will eliminate the benefit of being an authorized user and cause scores to go down.

'While FICO's move has largely remained under consumers' radar screen, its impact will be clearly felt when the change starts taking place in September, particularly among newly divorced women and a fresh crop of college students who will face a new hurdle in establishing credit for the first time,' says Ulzheimer.

Why the Change?

The change Fair Isaac will be making to the model is largely a result of complaints from the lending industry and trade groups like the National Association of Mortgage Brokers (NAMB ) who say that authorized users are undermining the system.

Most of the complaints about 'piggybacking' center on the practice of renting good credit from a third party service - a practice that has been growing in popularity.

There are already a number of companies out there acting as middlemen between people with good credit looking to make money and people with bad credit looking to boost their credit scores, and more services like this are cropping up every month.

The cost of renting credit depends on the service that you use. Most services charge somewhere between $300 and $3,000. It may sound expensive, but consumers can boost their score by as much as 200 points in a very short period of time.

A shady practice? NAMB says yes.

'We believe that renting the credit history of an unknown or unrelated individual in order to obtain a loan with a lower interest rate is an unethical practice,' said NAMB President Harry Dinham. 'This practice defeats the very purpose of credit scores.'

How Will the Change Affect Mortgage Loan Availability?

If credit scores do begin to drop in September as predicted, mortgage borrowers will feel the impact. Lenders are already tightening credit standards because of problems in both the prime and subprime sectors. Lower credit scores are bound to leave some borrowers out in the cold.

There is also a chance you may receive a rejection simply because you're an authorized user on someone else's account. According to an article by OriginatorTimes.com, there have been unconfirmed reports from around the country that any loans containing authorized user trade lines are being rejected by several of the major mortgage lenders.

What Can Consumers Do?

If you're an authorized user on someone else's account and want to maintain this benefit, the best thing you can do is become a joint account holder. This is the only loophole that will be left once the FICO model changes.

If you disagree with overhaul, you can also sign one of the many petitions currently circling the web. An example of one such petition can be found at StopFICO.com.