Fair Isaac Corporation, a company responsible for the FICO credit score system introduces new model called FICO08. Lenders were asking for a new way to determine borrowers’ financial strength and a probability of risks associated with defaults on payments.
FICO is used by most banks not only to make a decision whether to provide a borrower with a credit, but to determine interest rates and other terms. FICO is also used when making decisions by insurance carriers, utility and cell phone providers, and other companies.
Changes made to this system, by estimate by Fair Isaac Corporation, would help banks reduce risks by 5 to 15 percent. It will not punish borrowers who make occasional mistakes, but will affect those with repeated delays. As an example, a person who was late once on one account but is current on multiple other accounts will not be affected as opposed to a consumer with several delinquent accounts, whose credit score will be decreased significantly.
One of the big changes is in assessing authorized users, who are not responsible for paying a credit card, but have the benefit of having that account on their credit history thus affecting their credit score. This trick has been used by parents to increase the credit score of their children and by spouses.
Other factors will remain the same, including length and timeliness of payment history, debt ratio, number of inquiries, and the score range, which will still be from 300 to 850.