The Fair Isaac Company, or FICO, is going to be rolling out their new credit scoring model very soon. Here are some of the highlights we should be aware of.
First some of the good things.
The new model will allow the use of some Authorized User accounts so that adding a spouse or child can benefit their scores. However, FICO has figured out a way to prevent the so called "rented users" from taking advantage of that feature. The next things is this will be a little more forgiving to clients that have had a repossession or charge off as long as the credit has been clean since that time. The best news is that collections under $100 will now be ignored by this model so little things like library fines, small bounced checks, parking fines or small medical collections will show up on a report but not be factored into the scores.
Now for some of the bad things.
If a client closes accounts it will be factored as a hit on credit scores especially if they have more closed accounts than open accounts on their report. Make sure you council your buyers to leave accounts open if they are trying to raise their scores. They can pay them off but don't close them. In the same vein if your client has some open accounts they never use, the creditor can close them and therefore bring the scores down. To prevent that from happening, tell them to use the account just once in a while to keep them active. FICO 08 also puts a higher emphasis on a mix of credit. If the client only has a few credit cards they may have a lower score then if they have the credit cards and a car loan.
Now the real bad news.
FICO 08 will punish a buyer even more if they have high balances. The old rule was to keep your balances at around 30% but now they will give a higher score to those who keep the balances around 10%. In this day and age when banks are cutting credit limits without notice, a buyers score could drop significantly because one of their credit cards decided to slash their available credit down to the level of their current balance. To prevent this, buyers who receive notice this has already happened need to call their banks and ask them to reverse the decision or have them try moving balances around to a card that they are not using.
Also remember that even if someone pays their card off every month but maxes out the limit every month as well, the balance that is reported to the bureaus is the same as the balance sent out on their statement so if the report shows a high balance before it is paid off every month, the credit score will be lowered because of the high balance that is reported.
So just to sum up, tell your clients to keep an eye on the balances, keep a good mix of credit, and keep older accounts open and they will not be affected very much, if at all.
Credit for the above information on credit goes to:
Universal Lending Corp.