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Changes to the credit scoring system

E-mail|Link Posted by Jill Boynton October 14, 2009 10:54 AM

This year Fair Isaac Corp introduced some changes to its FICO scoring system. This is nothing new - changes to the system occur periodically, the last having taken place in 2004. The goal is to stay on top of evolving credit risks and improve reliability as a predictor of borrower defaults. How will these changes impact your credit score?

One significant change is that fewer points will be deducted for occasional credit transgressions - a rare missed payment of less than $100 - and more for chronic late-payers. Also it will stop the practice of allowing authorized users to benefit from the card holder's payment history. This is a popular strategy used by consumers with poor or no credit history to improve their scores.

FICO 08 also places greater weight on using a mix of credit - using both revolving and installment loans will increase your score relative to someone who uses only one type of credit.

The new system was rolled out early this year, but lenders can take their time adopting it. Therefore it probably won't impact your credit score for 12-18 months. It is estimated that scores will be 5 to 15 percent more predictive of credit risk when it is fully adopted. Most consumers won't see a significant change to their score.

The best thing that you can do to raise or keep your credit score high is to keep your debt level low and make your payments on time.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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About the contributors

Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.

Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.

Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master�s in business administration from Boston University.

Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.