FICO 08: How It Affects Your Credit Score
Your credit score affects many aspects of your life – whether or not you can get a mortgage loan or credit card, the rate you receive, whether or not a landlord will rent to you, and even whether or not you get certain jobs. The FICO score, produced by Fair Isaac Corporation, is the credit scoring model most commonly used by creditors. While the basic factors used in creating your credit score (payment history, level of debt, types of accounts, length of credit history, and variety) will not change, with their updated model, FICO 08, Fair Isaac has made some adjustments in an attempt to better differentiate between people that are good credit risks and bad credit risks.
One major difference between FICO 08 and the previous model is that authorized user accounts will no longer be used in calculating credit scores. (Authorized users are able to use the accounts but are not legally responsible for making payments. Previously, the primary user’s payment history on the card was used in calculating the authorized user’s score, whether positive or negative.) The change was made to combat a technique used by many credit repair clinics called piggybacking. With this technique, for a fee, people with good credit scores allowed strangers to be added as authorized users to their accounts, thus boosting the authorized users’ scores. This reduced the usefulness of the FICO score as a tool for predicting credit risk, since the authorized users’ scores instantaneously increased despite not changing their credit habits. While some took advantage of authorized user accounts many people added spouses or children as authorized users to help build their credit score. (This used to be an especially good way to establish credit scores for teens, since they cannot have their own credit cards.) However, due to privacy laws and the Fair Credit Reporting Act Fair Isaac cannot differentiate between authorized users who are family members to the primary user or strangers.
Another change with FICO 08 is that a greater distinction is made between serial late payers and one-time late payers. People who make a late payment will not be penalized as much as before if they have other accounts in good standing. Conversely, people who are severely or consistently late on multiple accounts will be penalized more than before. Also, more points will be given to people who have a variety of accounts, such as a credit card, store card, and car loan. People who have used a high percentage of their available credit will be penalized more than before.
What to do if your score drops
If all or most of your credit report consists of positive authorized user accounts your score will drop or disappear. However, you can see if you can be changed from an authorized user to a cosigner on the accounts. Cosigners are legally responsible for paying the debt, and the history for cosigned accounts can be included in calculating your credit score. (However, if the monthly payments are not made the creditor can now pursue you for the debt.) You can also work on building your own history. Even if you apply and get denied for a regular credit card you may be able to get a store or gas card (which can only be used at that specific store or gas station). If that does not work consider getting a secured credit card. Secured credit cards require that you put down a deposit, which the lender can keep if you do not make payments, and, usually, pay an annual fee, but they are the easiest cards to get.
If your score drops due to other factors work on correcting the reasons for your low score. If you have a negative payment history there is nothing you can do to change that history (most negative information can stay on your credit report for seven years), but paying off collection accounts and making payments on-time in the future will improve you score. If you have high balances focus on paying your debt down and not charging more on your cards. Not only will your score improve, but you will save money on interest payments!
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