Credit Score Range

Credit reporting agencies use complex formulas involving numerous financial documents to come up with the 3-digit numerical score banks and lenders use to determine a person’s creditworthiness.

This is what pushes the reporting agencies to provide information that is as reliable as possible; working hard to come up with formulas and computations that improve over time.

And this is the reason why FICO (formerly the Fair Isaac Corporation) has come up with a new, improved credit scoring model – the FICO® 08 – that will do a better job at predicting the likelihood of default on a loan. FICO 08 still uses the same scoring range (300 to 850) as the classic FICO scores. The real changes, however, come in credit transgressions and “piggybacking”.

Less Punishing for One-Time Delinquency

The new FICO 08 formula will now deduct fewer points for the occasional financial mistake but more for those with repeat offenders. For example, somebody who is unable to make one mortgage payment will take a lower credit score hit compared to the current FICO formula. Those who are repeatedly delinquent, however, will see a significantly greater drop to their FICO 08 credit score.

Killing off “Piggybacking”

FICO 08 will also put a stop to those that wish to artificially raise their credit scores by becoming an “authorized user” of somebody else’s credit card. The new formula does this in order to prevent deliberate misrepresentation of a person’s real creditworthiness.

The latter change has drawn the most criticisms, as shared credit histories will no longer be able to help those who most need it. Examples include parents aiming to help their children establish their own solid credit scores. Proponents of the change, however, cite that the fraud prevention aspects significantly outweigh the benefits of “piggybacking.”

Building Credit from the Ground Up

FICO 08 essentially rewards those that build their credit the old-fashioned way: applying for easy-to-acquire credit cards and building up a solid history of payments over time. It will still punish those that fail to pay their obligations on time, but it is generally more forgiving for those that are affected by extraordinary financial circumstances – like medical emergencies or unemployment.

TransUnion to Offer FICO® 08 in 2011

TransUnion is the first among the big three credit reporting agencies to push through with the new FICO 08 system. A spokesman from TransUnion says, however, that the agency will need 12 to 18 months of internal testing before the system will be acceptable for public use. This pushes back the effective implementation of FICO 08; meaning it will take some time before consumers will actually be affected by the new formula.