Perfect Credit Score Not Estimator Of True Wealth

It looks like Fair Isaac is reacting to this recent lending debacle by improving on its formula for creating the almighty FICO score.  Habitual late-payers will see their credit score more heavily penalized, while those of us with the occasional 1-30 day late payment will be spared a few points to the negative.  Of course all this reprogramming isn’t being done for your benefit; it is for the benefit of lenders whose bottom lines were eaten alive by sub-prime customers.

Changes to FICO Calculation

What do the changes mean for you? Unless you plan to run out and acquire new debt, probably not much.  The changes do emphasize the need to implement your debt snowball plan and start paying things off quickly.  Those with higher credit limit utilization (balance to credit limit ratio) will be hit harder in the FICO 08 scoring model, so it pays to drive those high balances down lower.

No more piggyback rides allowed. This may be one of the only positives out of the new FICO changes.  Previously, people listed as “authorized users” still got benefits of having a good credit line, even though they were not financially responsible for the account. 

Many of those late-night credit repair crooks used this technique to improve scores.  They would pay a person with good credit to add someone with lousy credit as an authorized user (of course, Lousy never got a card or the number).  By virtue of being paired up with Mr. Credit Pimp and his perfect credit score, Lousy saw her credit score increase.  Under the new model only an account’s applicant or co-applicant will have their credit score impacted by account activity.

Perfect Credit Score Does Not Guarantee Financial Stability

FICO has really dumbed down the financial industry. I guess in some ways FICO has helped to prevent discriminatory lending practices (after all, it’s just a number, not a sex, race, or age).  However, the negatives far outweigh the positives in my opinion. 

Banks used to consider how long someone was on the job, or whether or not they paid their landlord on time, when considering lending money.  An employer would use interviews and a firm-handshake-test to determine if someone was trustworthy.  I remember when I worked in a new credit department of a large financial firm the only things that mattered on an application where FICO and income.

These days we look down on people with poor credit scores and exalt those with a perfect credit score in the 800′s. Can you imagine the personals in only a few years?  Male 6’3″/220lbs/760 FICO seeking Female in the 720-760 range.

Wanna see how you measure up? Check out MyFICO.com to check your current credit score.

Comments

  1. I was reading an article on this earlier – I’m glad you wrote more about it because I haven’t had a chance to do much research on it. The article I read was somewhat vague – your article made it a lot clearer what was going on and how it will affect me. I still am not sure what I think about it, though. :)

  2. FrugalDad, wanted to make sure your readers knew that the FICO 08 model, which was going to remove authorized user impact, was switched before introduction so that authorized users can still get their scores impacted. Fair Isaac says they have a way to spot the “late night credit repair” folks methods, but they haven’t offered details on how this going to work.

    While FICO isn’t perfect, it was never intended to be a one score for all decisions score. This mortgage mess was caused, in part, by mortgage companies ignoring income and other important qualifications, and awarding loans on FICO alone. The score wasn’t designed for that. It was meant to, and does a better job of, evaluating credit reports than humans do. Human error tends to lead to more bad decisions. But again, I agree with you that numerous factors should be evaluated.

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