New FICO 08 is coming

I suspect that based upon current conditions the increase won't be peoples scores but, their interest rates.

Starting this May, Fair Isaac, the company that provides FICO scores to 90% of the largest 100 banking institutions (according to them) will institute a new and as they claim "improved" model. This model, they predict, will help lenders reduce default rates on their consumer credit files by 5 to 15%.

Scores will still range from 300 to 850 points. A consumer with a higher score will have a better chance of getting a loan at a lower interest rate and the consumer with a lower score will have a more difficult time getting credit and will expect to pay a higher interest rate on that loan or line of credit.

Factors that are taken into consideration when calculating these scores will still be the same: the level of indebtedness and payment history (this is the one to watch and I will explain more below) length of credit history, the number of inquiries and the recent establishment of credit, and the "type" of credit used (department store cards, gas cards, authorized user (this is going to change too), mortgage or auto loan, etc.)

In theory, 2 people that used to have the same scores could now see one score rise and the other score fall. FICO 08 will presumably give more points to consumers who maintain a variety of credit types, a mix of auto, mortgage and credit card debts. This is not unusual as it has always been taken into consideration and valued the different types of credit a person has established.

A person with a department store credit card that has always made their payments or even paid the card off every month will usually not score as high as someone who has a mortgage payment that has made their payments on time each month. That would be expected. However, with the "new and improved" model - FICO will penalize an individual who carries a high percentage of their available credit. This means that if you have a good mix of credit, have been making all of your payments on time but carry some high balances on your credit cards - your score will go down. Those that have low credit balances and have maintained good payment histories will see their scores go up.

Those of you that have added "authorized users" to help build up that persons credit profile (you added a spouse or your son/daughter to help them establish credit) will also see a change. This practice, referred to as "piggybacking", won't impact the person's credit score that you were trying to help anymore. It seems that in the past, there have been some companies that provided this service to people with "less than desirable" credit profiles to help improve their client's scores. They would use people with good scores and lines of credit and add people with poor credit as authorized users, in order to boost their scores.

I have read that Fair Isaac claims that with the new scoring system that overall, more consumers will see their FICO scores go up slightly vs. those people that will see their scores drop. Remember, a drop in your score can not only mean that with any new credit that you are seeking you could pay a higher interest rate or even be denied but, your creditors could immediately lower your lines of available credit (triggering a maxed out credit line which could also hurt your score again) and raise your current interest rates based upon your new "risk" factor and invoking a "universal default provision".

Now, let's look at some current credit card trends and see what you think will happen. Do you think most consumers will benefit financially from this or more banks/lenders will benefit financially from this? After all, if more people see a positive raise in their FICO scores, they should be able to get lower interest rates, refinance their sub-prime loans and capitalize on all those 0% credit card balance transfer offers that are flooding the market place right now.

1. Americans are approaching 1 Trillion dollars in credit card debt.


2. Consumers charged $68 Billion worth of purchases last year alone. A 7.8% increase and the largest increase in 7 years.


3. 60% of all consumers carry a balance on their credit cards.


4. According to the Department of Labor - for every $1,000 of disposable income, the average American spent $1,005.


5. In 2007, credit card debt hit an all time high of $943.5 Billion and has grown 22 percent in the past 5 years and more than doubled since 1996 - according to the Federal Reserve Board.


6. In the 1980's the American consumer saved between 10 and 11% of their disposable income. Since 2005, according to the US Department of Commerce, Americans have saved less than 1%.


7. In 2006, credit card companies made $17 billion, just in penalty fees, according to U.S. PIRG (The Federation of State Public Interest Groups).


8. In 2006, consumers received nearly 8 billion direct mail credit card solicitations.


9. Some credit card contracts say in the fine print that the company may change terms, including interest rates, "at any time for any reason, including no reason". This is a practice called a "universal default provision". This means that if you are late on a payment, if you apply and are denied credit, even if you have made all of your payments on time but are carrying a high balance that triggers a lower FICO score showing that you are more of a credit risk. you could see a rate increase across most of your credit cards. For an example: If you had 5 credit cards. You made payments on time to 4 of them but were late on the 5th card, all 5 credit card companies could invoke (if they had this provision, most do) the universal default provision.


10. The average credit card rate of interest when enforcing this "universal default provision" is as high as 36%.


11. According to CardTrack.com - the percentage of people that are delinquent on their credit card payments is the highest it's been in three years.

With the new FICO 08 model - anyone carrying a balance of over 50% of available credit (meaning if you have a credit card with a $5,000 credit line and you owe $2,501 or more) you will be penalized for it.

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