Understanding the New FICO 08 Scoring System

Your FICO credit score is the statistical data, developed by Fair Isaac & Company, which determines your financial position and creditworthiness, and indicates your bankruptcy. A credit score usually ranges from 350 - 850 or 300 - 850. Only 1% of the American population has a FICO score above 800. Most people score in the 600s and 700s while the bottom 20% of the population scores below 600.

It is important because over 75% of mortgage lenders and 80% of the largest financial institutions use FICO scores in their evaluation and approval process for credit applications. In other words, the interest rate on credit cards, home loans, auto loans and so forth is solely based on your FICO score. Your credit score is what they use to determine how likely you are to pay bills on time. The higher the score, the cheaper the loan. If your FICO score is less than 619, you are basically considered a very high risk, and you will either be denied credit or get it at a much higher interest rate than those offered to low-risk borrowers.

Your credit score is determined by 5 main categories:

1. Payment History

- Payment information on accounts such as credit cards, retail accounts and mortgages

- Adverse public records such as bankruptcy, suits, wage attachments, etc.

- Collection and/or delinquency problems

- Amount past due on delinquent accounts or collection items

- Number of times items were past due

- Number of accounts paid as agreed

2. Amounts Owed

- Amount owing on accounts

- Number of accounts with balances

- Proportion of credit lines used to total credit limits on revolving accounts

- Proportion of installment loan amounts still owed

3. Length of Credit History

4. New Credit

- Number of recently opened accounts and types of accounts

- Number of recent credit inquiries

- Time since new credit inquiries

- Time since the re-establishment of a positive credit history following past payment problems

5. Types of credit used

1. FICO 08 will eliminate the impact of authorized credit card users. In other words, when scoring a consumer, the new system will no longer take into consideration credit-card accounts for which that person is an authorized user. Authorized users are normally spouses or children of primary card holders, who do not have credit card accounts of their own and try to build their credit histories. This change is made in order to stop some people with bad credit from undermining the system by becoming authorized users of a friend or a total stranger with a good credit history. However, it will certainly hurt those spouses and children of card-holders who legitimately used the practice to build their own credit.
2. Scores will still be calculated from the 5 factors above as the old version, but FICO will go easier on people who make the occasional slip. For example, if a borrower makes a late payment on one account but pays on time on several other accounts, his/her FICO score won't drop too much. On the other hand, FICO will come down harder on those with multiple delinquent accounts.
3. FICO 08 will give more points to consumers who maintain a variety of credit types, for it proves that they can manage payments on various kinds of loans. As for those who use a high percentage of their available credit, however, the new scoring system will penalize them more severely.

1. Pay your bills on time.
2. Do not open a lot of new accounts during a short period of time. It makes lenders very queasy.
3. Do not open a lot of store credit cards just to get the initial 10%discount. Open only credit cards that you think you will actually use.
4. Transferring balances too often actually lowers your credit score, so just try to pay them off instead of moving them around.
5. Try to use your credit cards less. And if possible, pay them off every month. The bigger the space between your total credit limits and the balance you carry, the better.
6. Do not close your old paid-off accounts. By closing them, you shorten your credit report, which somehow makes you seem less creditworthy to the lenders. Craig Watts, an executive at Fair Isaac & Co., once said, "Closing accounts can never help your score, and often it can hurt."
7. If you have made a late payment, try to contact the lender and ask them to remove this information from your records in a "goodwill adjustment." They may say yes or no, but it's absolutely worth a try.
8. Before opening a new account, ALWAYS read the fine print. The heart of the credit card transaction is in the FINE PRINT. Don't fall for a teaser or promotional rate. Most teasers have time limits. After the introductory period ends, the "real" APR is usually very high. So if you are already struggling and trying to make ends meet, choose a credit card that works best for you in the long run.
9. If you have so much debt and are in danger of bankruptcy, consider working with a nonprofit agency such as Consumer Credit Counseling Services; they can help you negotiate lower interest rates, which enable you to pay off your bills within a few years.