Key Highlights

  • The new FICO credit-scoring model was designed to help lenders better identify risky borrowers and reduce default rates.
  • The new FICO model now accounts for late credit card payments and debt as well as credit card balances and floating payment amounts
  • Equifax, Experian and Trans Union will all use this new FICO model

Banks and local merchants began buying lists of “good customers,” customers who would pay off their debts or loans, in the late 1880’s. By the time 1956 rolled around, the Fair Isaac Corporation was founded on the premise that math, data and algorithms could help businesses, banks and underwriters make better decisions about who was credit worthy and who was not.

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Fair Isaac Co. launched its first FICO credit risk score in 1987. Fair Isaac then made their math, algorithms and credit scores available to Equifax, Trans Union and Experian and in 1991, the mortgage industry followed Fannie Mae and Freddie Mac into using Fair Isaac’s FICO scores.

FICO scores have been built on these five factors historically:

  • 35% payment history
  • 30% amounts owned
  • 15% length of credit history
  • 10% credit mix
  • 10% new credit or number and amounts of multiple credit streams.

As of this summer, 2020, new changes will be added to historical FICO factors to even better determine credit worthiness. Late credit card payments and debt will be treated “more severely” under FICO’s new algorithm. Credit card balances and payment amounts will now be scrutinized.

“If your balances are trending low or if you pay in full every month, you’ll score higher, “ said John Ulzheimer, credit expert and president of the Ulzheimer Group in Atlanta. “(This new FICO algorithm) will help differentiate between a consumer who is a ‘transactor’ and one who is a revolver.”

Credit experts agree that most credit scores for some 110M consumers, 80% of consumers, won’t change one way or the other with this new algorithm enhanced by credit card histories and credit payment amounts. Another 40M consumers may very likely see their credit scores increase by some 20 points with this new FICO model. And, most experts agree that another 40M consumers, or 20%, may likely see their credit scores drop by some 20 points when credit card histories are factored into this new FICO model.

For your reference, FICO score rankings translate into these ranges of credit-worthiness:

  • 760 – 849 – excellent
  • 700 – 759 – great
  • 660 – 699 – good
  • 620 – 659 – average
  • 580 – 619 – poor
  • below 579 – very poor

Though the new FICO algorithm will be available this summer, most credit experts see the new FICO model taking effect the soonest by the end of 2020 and the latest some years down the road from now. Mortgage lenders, banks and other lenders tend to be slow in making changes to new algorithms. Al Bingham, a credit expert and author of “The Road to 850,” said, FICO can put out any product they want, but if it doesn’t get used, it has no relevance for consumers until that happens.”

 

Thanks to Fortune Magazine, CNBC and InmanNews for source data.

Also read: Zillow Now Gathering Brokerage Licenses “…But It’s Not What You Think”, Podcast: 14 Rules For Financial Peace | How To Build Real Wealth, Now., Podcast: 14 Rules For Financial Peace | How To Build Real Wealth, Now. (Part 2)