By this spring, two of three credit reporting bureaus will use a new model. Fair Isaac, the developer of FICO scores, has made the biggest change to its credit score model since it was introduced in 1989. Scores will still be on a 300- to 850-point scale. But the company estimates that 40% to 50% of borrowers’ scores could go up or down by more than 20 points because of how the new model evaluates consumers’ credit use behavior.
Most important for customers the average borrower / credit card owner will have a little leeway and forgiveness when it comes to an occasional late payment. Fair Isaac has increased the number of groups that customers fall into from 10 to 12, taking into more account the number and magnitude of credit problems. Infrequent problem borrowers will no longer be lumped in with habitual delinquents. For example, if you have one isolated missed payment you won’t score as low as before. The new FICO model also focuses less on how many accounts a borrower has and more on the amount of balances carried. A good rule of thumb is to keep credit card balancesd below 50% of the actual credit limit.
FICO scores are becoming increasingly important for borrowers looking to qualify for favorable terms. That puts high scorers in even a better position for pricing on loans as the economy recovers. Besides loans and credit card acceptance, things like insurance are all affected by one’s credit score. Remember, the cost of borrowing money and repaying it is all based on risk. How risky are you? Your FICO score is the first impression.
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