By JLP | December 29, 2008
The three credit bureaus will begin using a new formula to calculate credit scores in 2009 – just as folks were starting to get the hang of what goes into the old formula. Transunion will roll out the new formula in January, Equifax in the Spring, and Experian is TBD as of yet.
The primary difference in the new formula (dubbed “FICO 08, as it was supposed to be rolled out in 2008) is that it is even more sensitive than the classic FICO as to how much of your available credit you’re using.
According to Yahoo! Finance columnist Liz Pulliam Weston, “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.” Not. Good.
The new scoring formula also responds more negatively if consumers have few open, active accounts. So make sure to use your oldest cards at least quarterly in order to keep them active. And it might be worth opening another account if you only have one or two (this will raise your overall credit limit AND the number of accounts in good standing you have – as long as you keep them in good standing).
Another negative impact is that they are “materially limiting” the impact on your score if you are merely an authorized user on someone else’s account. So now new college grads – and spouses with limited credit in their own name – will not benefit substantially by adding their name to credit accounts of their parents’ and spouse’s.
OK, time for some good news. Collections items and even “mishaps” like charge-offs and repossessions won’t hurt you as much.
The new formula ignores small collection accounts in which the original debt was less than $100. This is a big victory for consumers and one I’ve advocated for years, because niggling little debts — created by unpaid library fines, forgotten parking tickets or a small medical bill that slipped through the insurance cracks — had an outsize impact on people’s scores.
Fair Isaac says the new version is less punishing to those who have had a serious credit setback, such as a charge-off or a repossession, as long as their other active credit accounts are all in good standing.
[Excerpt from Liz Pulliam Weston’s article, linked above.]
This sounds like nothing but bad news for consumers, except potentially for consumers with charge-offs and / or collections items.
More from Meg at The World of Wealth