FICO 08: The Next Generation in Credit Scoring

In an effort to more accurately assess the credit risk of borrowers, Fair Isaac is making further tweaks to its formula for credit scoring. The Wall Street Journal and MSNMoney have recently reported on some of the changes in the pipeline. Highlights of the new scoring model, called FICO 08, include:

• Eliminating the benefits of “piggybacking,” as outlined in a prior post, where scores are artificially boosted by adding authorized users onto an established credit line
• Rewarding those with more varied types of credit, such as having both revolving (e.g., credit cards) and installment accounts (e.g., mortgages, auto loans)
• Penalizing those who use a high percentage of their available credit
• Increasing the importance of keeping accounts active
• Allowing more leeway for borrowers more than 90 days late on a payment if most of their other accounts are in good standing; conversely, penalizing borrowers who have multiple such delinquent accounts more harshly

The score itself will still have the same scale, with scores ranging from 300 to 850, and be based upon the familiar parameters of payment histories, credit history length, number and type of credit inquiries, as well as the mix of credit accounts in use. Because of disputes between Fair Isaac and the three credit bureaus, however, it is unclear as to the exact timeline of Fico08’s release. For more details, see the WSJ or MSNMoney articles.