Your credit score can have an impact on many aspects of your life – whether you can get a mortgage, loan, or credit card, the rate you receive, whether a landlord will rent to you, and even whether you get certain jobs. The FICO score, produced by Fair Isaac Corporation, is the credit scoring model most commonly used by creditors. While the basic factors considered (payment history, level of debt, length of credit history, types of accounts, and pursuit of new credit) have not changed, with their updated model, FICO 08, Fair Isaac has made some adjustments to the way credit scores are calculated. Knowing what they are, and what improvements you can make if your credit score is negatively affected, can help you ensure that your score does not hold you back.
- Credit utilization: Your credit utilization ratio measures your level of debt relative to the amount of credit available to you (your credit limits). Having a high ratio has always been seen as a negative by the FICO scoring system, and under FICO 08, those who have utilized most of their available credit are penalized even more.
- Authorized user accounts: FICO® Score 8 substantially reduces any benefit of so-called trade line “piggy-backing”. That’s when you get added as an authorized user on someone else’s accounts in order to reap the benefits of the history of their trade line.
- Collection accounts: In general, having collection accounts on your credit report lowers your score. However, FICO 08 ignores collection accounts where the original balance was under $100.
- One-time mistakes: Under FICO 08, a greater distinction is made between serial late payers and one-time late payers. People who made a late payment or had another setback on one account are not penalized as much as before if they have other accounts in good standing.
Improving your score
If you have a high credit utilization ratio or few open, active accounts, you may have seen your score drop with the implementation of FICO 08. Fortunately, credit scores are not permanent. If you make changes, your score will change too.
There are two ways you can lower your credit utilization ratio: ask your creditors to raise your credit limits and pay down your balances. You should not ask your creditors to raise your limits unless you are certain you can avoid charging more on your cards. If a creditor raises your limit by $1,000 and you charge $980 the next day, all you are really doing is increasing your level of debt. Paying down balances is something that anyone can do. Since the minimum required payments are often set very low, try sending more than the minimum whenever you can. You can also ask your creditors to lower your interest rates (the lower the interest charges, the faster the principal gets paid down) – they may say no, but it does not hurt to ask.
With the FICO scoring formula being tweaked periodically (not to mention the fact that alternative scoring systems are popping up all the time), it is easy to become worried about hard it is to maintain a good credit score. After all, something that may not have much weight today could be given greater weight tomorrow. Certainly, scoring models can vary and change, but one thing remains constant – responsibility is rewarded. If you have credit (but keep your debt levels low) and make your payments on time, you will have a good score regardless of the specific formula being used.