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Bureaus Roll Out New Credit Score Formula for 2009

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

Topics: Miscellaneous | 17 Comments »


17 Responses to “Bureaus Roll Out New Credit Score Formula for 2009”

  1. Rich Says:
    December 29th, 2008 at 10:29 pm

    So if you have an actual bad credit history, your credit score will improve. But if you are responsible and use cash, which results in your limits getting lowered, your score will go down?

    It’s no wonder we’re in the mess we’re in now.

  2. poor boomer Says:
    December 30th, 2008 at 3:45 am

    When I heard about widespread credit limit reductions, my first thought was…

    Oh, I see what happens now: credit limit reduced –> credit utilization (credit used as % of limit) increases –> scores go south –> interest rates go north.

    You can’t win until you get rid of the (house of) cards.

  3. BankerBryan Says:
    December 30th, 2008 at 6:29 am

    I can’t wait to see how this new system pans out. As a lender, I can tell you there are a lot of things wrong with the current system.

    I find myself looking at a seemingly good credit report with bad scores, and horrible reports with good scores more times than you would think. Granted, most are fairly accurate, but many are not.

    I hope the new changes will better reflect people’s overall history and paint a better picture of their willingness and ability to repay debt. I know it would make my job a lot easier.

  4. Doug Says:
    December 30th, 2008 at 6:33 am

    NO YOU CAN’T FIGHT THE FED!!!!
    The old saying “You can’t fight the Fed” has never been more true than it is today. It may have just taken on a little different meaning. You can’t fight the Fed in this environment because their relentless printing of money will cause the value of the dollar to decline. Maybe it really had to be done to save the banking system (but right or wrong printing money will have the same effect–it will decrease the value of the dollar). I hate to continually make the weak dollar argument as it almost seems unpatriotic, but you cannot deny the effects of the Fed’s recent actions. I have gotten many responses arguing that the dollar is still the world’s reserve currency and will remain so as we pull out of this crisis. But is this time different? I would argue that it is. Let me say one more time that China is still growing (growth is declining, but growth is still growth). Is China poised to gain some of the market share of the “reserve currency”? They are positioning themselves to do just that. Read the remainder of the article at http://www.stockshotz.blogspot.com

  5. rbk Says:
    December 30th, 2008 at 10:15 am

    Any change happening to the FICO score is based in data. If it turns out that the effect of something like a chargeoff is lessened and the effect of something like high utility is increased, it’s because the data show the latter to be more of an indicator of credit risk than the former. I’m not a big fan of Fair, Isaac (I used to work for a competitor) but they are very good at what they do and it’s all data-driven. They are not trying to encourage or discourage certain behaviors; they seek only to sort people from best to worst credit to provide the best available advice to lenders. The gnashing of teeth over a change to the FICO score is a bit out of line.

  6. kitty Says:
    December 30th, 2008 at 12:21 pm

    My biggest problem with the way they calculate the score is that repaying your mortgage actually hurts rather than helps your credit score. Not much, but it’s still seems stupid: your credit report still contains your old mortgage with usual “paid as agreed” for all the past years and the fact that you repaid it. I know it happened with one blogger. I also checked my credit score once when I got my annual credit report and I got my credit score out of curiosity. Not the FICO one, but the one from one of credit companies – I hadn’t realized that was what I was ordering. It was fine, but not as high as I thought it’d be.

    Now, I haven’t EVER missed a payment in my life, my credit history goes back over 20 years, one of my CCs is over 10 years old, and my utilization is in single percentage digits. One of the reasons listed was no housing loans. Well, yes, I paid off my mortgage, do they expect me to take a home equity loan I don’t need?

    Now it doesn’t hurt me – I don’t know what my FICO score is, but it is good enough to receive zillion of preapproved 0% offers. Nor has AmEx or any other card reduced my credit 13K+ limit. Besides, I don’t need the money, at least unless someone wants to give it to me on the same conditions our government gets it nowadays. But it still seems stupid.

  7. Ken Says:
    December 30th, 2008 at 12:28 pm

    I received a letter in the mail yesterday from Chase that they have closed my credit card account due to inactivity over a two year period. I guess this will hurt my score now.

  8. sam Says:
    December 30th, 2008 at 12:59 pm

    Dave Ramsay refers to the FICO score as the “I love debt” score. I think I understand why now. The more you charge and go into debt, as long as you pay it off eventually, the better your score.

  9. Jon Says:
    December 30th, 2008 at 1:05 pm

    Chase just increased my credit limit about 30%. I thought it was just random because I only use about 10% of my limit. Maybe they’re looking out for my credit score. Thanks Chase!

  10. kitty Says:
    December 30th, 2008 at 10:16 pm

    “Dave Ramsay refers to the FICO score as the “I love debt” score. I think I understand why now. The more you charge and go into debt, as long as you pay it off eventually, the better your score.”

    Hello? The more debt you have the higher your utilization ratio (ratio of debt to available credit). Higher utilization = lower score. This is elementary school math.

    The formula may have a bug or two regarding handling of paid off mortgages but the effect is minor.

    But as to the rest of it – you don’t need to carry balances to have a good score. In fact, if you pay your balances in full, your score is higher.

  11. Dan Says:
    January 15th, 2009 at 11:07 am

    Kitty is spot on.

    I don’t see what the hub-bub is about. Increased attention to the utilization numbers is appropriate IMO.

    Utilization is your debt divided by your credit limits. The denominator gives a great indication of banks’ opinions of your creditworthiness, and the numberator gives a great indication of how you’ve used that credit. Bravo to the credit bureaus on rewarding those of us who don’t max out our cards!

    As for the new policy of ignoring collections accounts under $100 – I don’t loudly object, but I think perhaps lowering the weighting would have been more appropriate than ignoring such accounts completely. I don’t see creditworthiness in somebody who took advantage of free cable tv for a couple of months by simply not paying the bill until it was turned off. It should be a mark on their credit, although I can understand why they wouldn’t want it to be as big of a mark as larger delinquencies.

  12. Delawrenceblue Says:
    February 2nd, 2009 at 2:40 am

    The 2009 improvements to FICO scoring system are great. I own shares in Citigroup and I hope now they can start making money again. The problem we have in America is one of lack of knowledge one how to properly use credit. Credit should be used carefully and all the risks factors should be understood.

  13. Brian Patton, CCIM Says:
    May 7th, 2009 at 9:20 am

    No doubt that this change is to help those caught up in the mortgage debacle. Doesn’t seem to help cash strong customers. Kudos to Doug’s post. He’s right on the inflation/dollar decline argument. The only bright spot in that is that real estate investors will see an increase in the “number of dollars” that their real estate is worth. This doesn’t really translate into increased value though. Check out my article on this subject at:
    http://www.northfulton.com/Articles-i-2008-03-20-170780.112113_Experts_say_focus_on_bad_news_creates_crisis_of_confidence.html

    http://www.capitallistings.com

  14. tom mcculloch Says:
    October 31st, 2009 at 8:52 am

    I came to this article trying to find the actual algebraic formula that is used to arrive at the credit score. Once you know the old formula it is easier to see exactly what changed and how it impacts the “new” credit score. And if all 3 credit bureaus use the same formula and yet all 3 have slightly different scores, it leads one to think each bureau puts their own distictive “spin” on the exact same data reported by lenders. Exactly what is the formula(s) used??? Or is the resulting number they drive our credit-life by top-secret?

  15. Madison Brown Says:
    May 25th, 2010 at 12:52 pm

    i am not a fan of having credits and getting credits cards.’*:

  16. Jessica Bailey Says:
    August 29th, 2010 at 11:34 pm

    i always want to have a very good credit record but due to recession, that changed.”*

  17. Phil Owens Says:
    January 2nd, 2011 at 12:10 pm

    I agree with Tom McCullouch’s comment from Oct ’09. Why should credit reporting agencies be allowed to keep secret the formula they use to report our credit? This leaves room for all sorts of discretionary reporting based on who-knows-what. Fair Lending legislation should include a provision by which these calculations are “open” and anyone with credit report in hand can verify the accuracy of the score.

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