Your FICO® score is a credit score generated by a proprietary software system developed by Fair Isaac & Co. A credit score is a method of determining the likelihood that a borrower will repay his or her loans. A credit score condenses a borrower's credit history into a single number ranging from the 300s to 850, with most people falling into the 600-700 range. The higher your score, the more favorable your terms (lower interest rate) will be when applying for a loan.
Due to the overall change in consumer credit habits, Fair Isaac & Co. has created a new version of FICO. Under the new system, FICO 08, various weighted factors used historically to determine credit scores have changed, and, thus, may have a slight impact on your credit scores. According to Fair Isaac & Co., the new scoring formula more accurately reflects information found within credit bureau records.
The following are some of the FICO 08 changes:
- The score continues to range from 300 up to 850 for a good credit risk. Most people fall into the 600-700 range. The higher your score, the more favorable your terms (lower interest rates, etc.) will be when applying for a loan.
- One-time serious credit setbacks will not negatively impact your credit score as much as they did in the past, provided your other accounts remain in good standing. Therefore, an isolated offense, such as a charge off or car repossession will be less punishing than in the past. On the other hand, persistent late payments will still be harmful to your overall score.
- The score is more sensitive to the percentage of available credit you use on your revolving lines-of-credit. This could be a big concern in 2009, as many credit card issuers have begun to lower credit limits or even close accounts due to economic conditions, providing little or no warning to consumers. (To help prevent this from happening, if you maintain credit cards you seldom use, you should periodically use these credit cards for small purchases. Doing so will give creditors a reason to keep the account open. However, be sure to payoff the debt at the end of the month.)
- Unpaid collections, judgments, and tax liens with an original debt amount under $100 are no longer factored into your credit score. (These debts often stem from unpaid fines, such as parking tickets, library fines, or even medical bills.)
- The practice of authorized users or “piggy-backing” (adding a spouse or child to an account because of your good credit history) is still factored in. However, there is an increased focus on score fraud. Therefore, you can no longer pay credit repair agencies to allow you to piggyback on a stranger’s strong credit record to improve your own.
- The score will react more negatively to various types of activity if a person has a limited history (i.e. recent high school graduates, college students, etc). Therefore, the less of a credit history you have, the more difficult it is to predict your credit worthiness. Therefore, even though you want to try to avoid having debt in the first place, having it helps build your credit history resulting in higher FICO scores.
Keep in mind that FICO 08 is very new and not all lenders are using it yet. As a result, it may not be clear which factors are being used to assess your credit worthiness until all credit issuers are using one system. Therefore, following the tips below will help you maintain an accurate credit score:
- Never make late payments to your creditors.
- Do not exceed your credit limit (many credit companies will let you do this, but assess a fee for doing so).
- Try to stay well below 10-15 percent of your overall (all revolving credit-lines together) credit limit.
- If you have limited credit, work to obtain additional credit. Not having sufficient credit can negatively impact your score.
- Always review your credit card statements to look for unauthorized charges.
- Regularly review your credit report to ensure there are no accounts that have been opened without your knowledge.
To estimate what your FICO score is today, use the Fico Score Estimator, a free resource provided by VISA USA, Inc.