In September 2008, we reviewed what makes up an individual’s credit report. This month, I’d like to talk about the changes in credit scoring. Beginning this month, Fair Isaac Corporation (more commonly known as FICO) will change how it calculates credit scores. The FICO score is used by 90% of the nation’s largest lenders.
The new model will now take a closer look at the percentage of available credit that you are using. This means that it will be even more important to keep the credit that you are using below 50%. Credit bureaus will use the reported balance shown on your most recent statement to help calculate your credit score. If you find yourself charging quite a bit each month, you may be impacting your score negatively.
Another change to the FICO scoring model pertains to “authorized users.” In the past, an authorized user could help build his or her credit score by accessing the primary cardholder’s account. The upcoming changes will mean that it will take much longer for an authorized user to create a positive credit history.
On a positive note, the upcoming changes will now ignore collection accounts with original amounts of less than $100. So, while those parking tickets and library fines may still show up on your report, they will have less of an influence on your credit score. Another positive is the fact that charge-offs, repossessions, and other significant credit factors won’t be weighed as heavily as they were under the old system.
Again, it is important that you pull your credit reports on a yearly basis. The credit bureaus often make mistakes, so by checking your report you can correct those errors that may be affecting you negatively. It is also important to make sure that there aren’t items that you don’t know about. Identity theft is one of the fastest growing crime rates. By looking at your report, you will know if someone has accessed your information. You are entitled to one free report each year from each credit bureau, and you can access those reports at www.annualcreditreport.com.