Liz Pulliam Weston, one of my favorite personal-finance columnists, is out with a nice FICO 08 primer. The revised scoring system, which was supposed to have been released months ago, looks as though it's finally on track. TransUnion will offer the option to lender next month. Equifax plans to offer the score during the spring; and Experian has not yet committed to a date.
From MSN Money (hat tip, Hanadarko):Fair Isaac says the new score will do a better job of predicting defaults than the classic FICO, which is used in more than 75% of mortgage lending decisions and by 90% of the largest U.S. lenders.
But FICO 08 is even more sensitive than the classic FICO to how much of your available credit you're using. If your credit card issuer slashes your credit limit -- which is increasingly likely these days -- you could see your scores plunge, regardless of whether you carry a balance.
Another hazard: The new scoring formula responds more negatively if consumers have few open, active accounts. Because more credit card issuers are shutting down unused and unprofitable accounts, that boosts the chances of damage to your scores.
It's a minefield out there, folks. You better not be in the game without the playbook.
Get up to speed on the new rules by reading the rest of the story here (link).
Monday, December 29, 2008
New Threats To Credit Scores; Here Comes FICO 08
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41 comments:
It would be hard for the new FICO system to be any worse than the previous system.
In all of the gifts given to our banks and financial institutions not one piece of legislation has been written to help the consumer in terms of credit reporting accuracy. Now instead of addressing that issue we have more changes which will undoubtely increase the rates so many of us pay. Don't be fooled, this system will for the most part decrease consumer scores.
defective by design.
self fulfilling prophecy.
Catch-22.
It's a trap!
No doubt. Consumers BETTER be on their toes. Just doing my part here to make sure that we're all on the same page and working from the same playbook.
BTW, TrueCredit no longer offers daily pulls of your credit report. Yet they kept the price the same.
Drew, didn't know that. I no longer use TrueCredit, so I missed that.
Plus, TrueCredit was a joke. Said that you could pull daily but then canceled your account if you did.
CM,I post story from Kiplinger.com about FICO 08' a week ago ....
Anon, thanks. Also, where did you post that at? I remember seeing it.
I pulled daily on TC for years without a problem. I closely monitor my credit report even for balance information because I'm in self imposed credit rehab.
Drew, I used to pull daily as well. But then TrueCredit canceled my service (and a lot of other folks, too). It said that we were gaming the system -- trying to get bumpage.
TransUnion should have just invested in better technology -- like Experian did. Then it wouldn't have to worry about people getting bumpage from pulling their own reports.
I thought Fair Isaac was going to look into tweaking utilization impact (because of all of the recent CLD's).
They made it MORE sensitive?
Doesn't sound very Fair... Isaac
Clutch, I have a story later today -- one written by me -- that addresses that issue.
I posted on December 20th at ''When Paying Your Bill on Time Isn't Enough'' thread...... Kiplingers is reporting that the new FICO will be rolled out by EQ & TU in "spring of 2009"
New Credit Scoring System Ready for '09
"The biggest changes discourage piggybacking and penalizing infrequent delinquencies"
The Fair Isaac site has this info:
The increased predictive strength is a result of powerful new features, including:
Sharper scorecard segmentation. With 16 distinct scoring models, increased from 10, the FICO® 08 score delivers more precise evaluation of consumer segments. More refined segmentation for accounts with serious delinquencies and derogatory items, for instance, allows for more accurate risk assessment of those with previous credit problems. In addition, the new score includes scorecards that evaluate authorized user information in support of lender regulatory requirements.
Refined risk performance classification. The current FICO® score was developed on a performance measure that evaluates consumers based on the worst performance on any credit obligation. By contrast, the FICO® 08 score was developed on a performance measure that evaluates consumers based on the degree of negative performance across all credit obligations—specifically, the degree of “bad” behavior (90+ days past due) over the 24 months following scoring relative to “good” behavior (see Figure 3). This more closely approximates the expected performance an individual lender will observe on its customer portfolio.
Minimized impact of minor infractions. Small amount collection agency accounts, judgments and tax liens (original amount under $100) will no longer be evaluated by the FICO® 08 score. This ensures consumers are not negatively impacted by minor infractions like parking tickets and library fines.
Improved Auto and Bankcard Industry Options. These were updated to incorporate FICO® 08 score enhancements.
FICO® 08 score also incorporates new, patent-pending technology that protects lenders from authorized user (AU) abuse, while still supporting regulatory compliance (see sidebar* )
*
Protection from authorized user (AU) abuse
Recent “credit repair” tactics involving the manipulation of authorized user accounts have stirred industry-wide concern. This deliberate distortion of credit histories—often referred to as “piggybacking”—creates potential loss exposure for lenders. There is currently no information in the credit report that identifies legitimate AU relationships.
Still, many lenders want FICO® scores to continue considering spousal AU trade lines to support compliance with the Equal Credit Opportunity Act, Regulation B. In response, Fair Isaac analysts have developed patent-pending technology that includes AU data in the calculation of scores, while reducing potential impact from tampering.
“This breakthrough resolves an industry problem that has perplexed lenders and concerned regulators,” says Lisa Nelson, vice president of Scoring, Fair Isaac. Fair Isaac estimates that more than 50 million US consumers are legitimate authorized users on another person’s credit card.
Lenders are encouraged to work with their Legal and Compliance departments to understand the required steps to evaluate spousal AU information and ensure ECOA Regulation B compliance when using FICO® 08 score.
Thanks, Anon. I remember that now. Much appreciated.
I've been on CreditBoards for about 3 years also ;-)
Drew, can't be sure which Drew you are. There are too many Drews floating around here. Haha.
a.k.a. TheDrewbert on CreditBoard
Thanks, Drewbert. That's what I am going to call you. Easier that way.
I don't have a problem with utilization tweaks but it needs to be weighted for duration etc. IE, someone carrying a balance for one or two months isn't a big deal and is normal, carrying large balances for months or years to me is a warning sign. It's obnoxious that with a good payment history I have to run around paying balances before statements are cut for purchases I made last week for fear of carrying any balance on the CRAs.
One thing I did see on the other post that I agree with, the amount of available credit should and apparently is of concern to some creditors. I wonder if the days of someone making 75k a year while having 700k in available credit are gone.
Two things, Green.
One, I totally agree that it is ridiculous that many of us do have to pay before the statement cuts -- just so that we can show the proper utilization ratio.
Second, as long as utilization is weighted so heavily, Bank of America is giving bad advice (without providing more of an explanation). The advice is even more suspect when you factor FICO 08 into the equation.
Were it not for the fact that utilization is worth 30% in the FICO scoring model, I'd have no need to work on high limits. I'd like to see that part of the equation tweaked.
This afternoon I have a story coming out that talks about that issue.
On the subject of paying before the statement cuts, I've had difficulties getting a new account to report correctly unless I carry a balance on at least the first month. I've made a habit of carrying a small balance the first month and then PIF before cut date from then on.
Clutch, there is a lot left to be desired in this system. Would be nice if the card issuers reported activity -- whether there was a balance or not.
Does it cost for the credit card companies to update reports? I'd like to see something were the credit card companies must update the report if there has been a material shift in balance in the previous 5 - 7 days.
Drewbert, there is a cost for creditors to update records. Not sure of the cost, though. But it's not free.
Sounds like FICO '08 was designed for the pre-late-2008 credit crunch times. A bit too late Fair Isaaic. Now we need FICO '09 where utililzation shouldn't count for much, but the direction of balances (increasing/decreasing) along with the duration of balances should be focused on rather than the % utilized.
Think about it. Someone with high utilization isn't necessarily a credit risk, especially if they pay in full each month or their balances are decreasing. However, if someone's balances keep increasing every month, I'd say they're more likely to default.
Sean, exactly. That's the point I made this morning when I wrote about BOA and its secured-card customers.
The model needs to be tweaked.
My official rant will be on the site in about an hour.
I heard that the FICO 08 is going to base credit card use more seriously in score calculation. There was a guy on the radio here in Atlanta saying that the new system will give "lots" of points for people who use CCs month-in, month-out for 80 plus months in a row w/o missing a payment. Also that people under the new system, that only have CCs on their file will see their score drop by 10-15 pts because the new system is taking credit mix more seriously. Under the old system a person with a file w/ only 3 CCs used every month and paid in full could get a 770 or higher after about 3 yrs or so w/ no installment loans...no more under the new system,
Hey Creditmatters,
Do you believe the days of getting a credit card w/ just a good FICO are over even after all this financial mess is over in a couple of years (hopefully) or do you think banks will go back to their old ways once the financial system recovers in a couple years. I remember my dad telling that back in the 70s getting a credit card was liking apply for the FBI....income verification, employer interviews (yes, thats right), mode of living investigation, tax returns...all this for a Chase card back in 1974. Back then a CC was a status symbol, only about 8% of the population had one, now all you need is a SS# and a pulse and you are in with some lenders.
Anon@8:07pm, will be interesting to see what kind of information we get about FICO 08 during the coming months. I imagine that there will be some myths and some truths that trickle out.
Very interesting about mix. We'll see how that plays out.
Anon@8:16pm, what I believe is that everything is cyclical. Right now it seems as though credit standards are high. But trust me, these card issuers are addicted to fee and interest income. It's just a matter of time before things loosen up again.
Just a matter of time. Could be a while, but I have no doubt that things will swing the other way.
Here's my question for the crowd: Do you see FICO scores diminishing in their importance? I know, many lenders have FICO cut offs, specifically auto loan lenders but we've been seeing recently that lenders are looking far deeper into our credit reports than simply the score and many times deny high scorers credit due to other more specified information. If so many creditors are using their own algorithms to look so closely at our reports, FICO does not seem as important now.
It's definitely still EXTREMELY important to keep up the score(& all the behavior associated with it), but is it just me, or do we see a trend moving away from the FICO score?
Josh, I think creditors are placing less importance on the score right now. But, as you said, all of the good habits that create good scores will be important to creditors.
But, yes, FICO -- in my opinion -- is a smaller piece of the puzzle now. I think there is more manual underwriting taking place.
I will tell you this, though. My scores are right around 800 now. I would imagine that I would not have a problem getting approved for a card right now. But I do think that the approval would not be as easy as before. I'd still be approved, but it's my guess that there are more underwriting hoops to jump through.
Wondering, has anyone been hit with Amex wrath who has all scores over 800?
I imagine they have, Josh. Probably doesn't happen a lot, but I would imagine that no one is immune.
My charge card still works fine. No problems so far.
Have you pushed any significant amounts through the charge card? Or have you had any months of significant jumps?
BTW, I just realized that the American Express One Card is no longer being offered.
Josh, nothing significant. Just consistent spending.
Thanks. I saw this story yesterday on MSN and found it very informative as well. I am not sure how this system will be better but time will tell. I posted this yesterday morning as well so people can have the facts. Knowledge is power.
Julie, yep. Knowledge is power (KIP).
Just when I was hoping things might calm down in the credit card business. Have been thinking of closing one of my unused Visa cards. I wonder if that's a good idea or not right now?
Marshall, from my reading, it sounds like you might be smart to hold off on closing cards right now. Let's get some data under our belts before we make any moves.
So, if I pull my REAL FICO score from myFICO.com, will the scores be based on FICO 08? Atleast from TranUnion anyways? Or, is myFICO.com's scores only based on the classic FICO? Thanks.
The scores you get from myfico.com are the classic FICO score.
Meanwhile, lenders will have the option of using FICO 08 when they pull TransUnion later this month. Doesn't mean they will; they'll just have another option.
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