My mortgage company has upgraded our operating system and our email system. I upgraded my smart phone. This got me to thinking about the new, upgraded credit scoring system, FICO 8, and how most companies are ignoring it. What’s the difference between FICO 8 and the old FICO 2 they’re using? And why aren’t they upgrading? Here are the answers.
The Fair Isaac Company (who creates the credit scoring models) made these changes to FICO 8:
1) More severe punishment for keeping high credit card balances.
I’ve been telling folks to keep your credit card balances low. With FICO 8, a high balance-to-limit ratio will penalize you even more if you don’t pay heed. And for those who do? More points added for maintaining a low balance. I advocate keeping your balances below 30 percent of the limit.
2) More leniency for an uncharacteristic late payment.
If you have an isolated late payment that’s less than $100, you won’t get docked so many points. Why? You could be a good credit manager who forgot about that parking ticket or didn’t know you had a balance remaining with your old cell phone carrier who has now reported you to collections for $35.92.
On the other hand, if you have lots of late payments scattered over multiple accounts, your credit score will be hit harder with FICO 8.
3) Lower benefit of credit sharing.
A parent may add their 18-year old to their credit account to boost the child’s credit. The same for a family member helping a new immigrant. Or scammers who rents out their credit cards to people with bad credit for a fee. To protect against the scam, FICO 8 substantially reduces any benefit of account sharing.
Is Your Lender Using FICO 8?
No, your broker, banker, or full service mortgage lender is not using FICO 8. Why? Because the only versions allowed by Fannie Mae and Freddie Mac are these:
Experian: FICO 2
Equifax: Beacon 5.0
TransUnion: Classic 04
Why Haven’t They Upgraded?
When I traded in my Galaxy 4 for the Galaxy 7, it wasn’t free. And after companies upgrade their computer systems, typically, IT Support is kept hopping fixing issues. Multiply the cost and incidents by a million and you have your answer as to why the lending giants aren’t upgrading. Besides, according to them, the current credit scoring models are working just fine, so why bother?
If you know someone who needs to improve his or her credit — or if you are a person who wants to become an expert on credit yourself — I’ve written Repair Your Credit Like the Pros for the layperson to learn how the attorneys and certified credit repair specialists fix their clients’ credit. (See it here.) I would like to thank all the good folks who have purchased this book, and for all those who have written to tell me how life-changing it has been for them.
I’d also like to give a shout-out to the Boise, Idaho Envoy Mortgage lending team who purchased multiple copies to use as giveaways for their clients. Thanks!!!