A good credit score can make life much easier by making borrowing more accessible as well as cheaper but what is the potential impact of the changes to America’s most widely used scoring system?
FICO is the method favored by a range of lenders that can be found on the high street and on comparison sites such as moneysupermarket.com and one which has been in use for a number of years.
However, it has undergone a revamp that is set to be rolled out to the American public shortly, a move that will see people’s credit score changing either for the better or the worse.
The new system has not changed the points range or the fundamental indicators that are taken into account to assess the risk, but the weighting has shifted and some peripheral factors have been removed.
Just like before, FICO bases the credit score on amount of debt, regularity of payments, length of history, the combination of different types of debt and the ratio between available credit and debts as well as volume of new credit applications.
One of the changes most likely to affect individuals the most is the switch in emphasis between black marks on the credit history.
The new system will place far more importance on individuals with repeated late or missing payments, even if spread across different accounts than on those who have only the odd smudge on an otherwise immaculate record.
Individuals who have had problems with one or two payments will be pleasantly surprised to see that their FICO score will have increased under the new method of assessment, with the system far more tolerant of the odd slip.
Conversely, those with repeated delinquent payments on their record are likely to find their credit score significantly lower, hampering their ability to obtain future credit, including Lending Club loans. Some think that because they get rejected from Lending Club is that there’s a Lending Club Scam, but there’s not.
Another difference in the weighting relates to the types of debt held, as those that only hold revolving credit, such as borrowing on credit cards, will score far less than individuals who also have installment credit on their record.
While these two measures will undoubtedly affect some individuals, one of the other supposedly smaller changes is proving to be far more controversial.
Up until now, individuals who are named as authorized users on another person’s credit card, such as a spouse or parent, were able to gain valuable points on their score via this method.
The new criterion obliterates the authorized user points, as lenders have publicly criticized their inclusion for falsely manipulating or inflating an individual’s score.
However, the move by FICO to remove recognition of authorized user credit has not been popular with some groups suggesting that women and students will both be disadvantaged and may not be able to access affordable credit on their own as a result.
With far more women than men added to their spouse’s credit card, the move has been seen as discriminating against women but some experts have suggested that one way around the change is to keep existing sole name credit facilities open even after you get married or move in together.
While the FICO changes have caused a mixed reaction amongst consumers, lenders have pressured the company to release the new system as soon as possible as it is rumored to be able to improve default rates by as much as 15% by providing more accurate assessments.