The Restructured FICO Credit Scoring System

Posted by Hal James

People often worry about Big Brother watching us, but don’t give a second thought to their credit record. Well, your credit history is the foundation of many things impacting your life. In fact, your financial profile can be boiled down to a FICO score.

So, just what is a FICO score? FICO is an abbreviation for Fair, Isaacs and Company, the business that came up with the calculation. Your FICO score reflects a calculation of various elements on your credit score ranking from the type of debt you have to payment histories.

Any person borrowing significant funds has run into their FICO score at one point or another. You might think you know everything there is about the FICO, but you don’t. This is because the calculation just changed.

So, how exactly is FICO changing? Is FICO still, well, FICO or is it something else? Well, it is still the dominant credit calculation used by lenders, but the factors involved in coming up with the score have changed.

FICO has traditionally been criticized for incorrectly weighing demarkations on credit scores. For instance, a person that was late on one payment was hurt in their FICO score almost as much as person who missed four payments.

The restructured FICO calculation corrects this. People missing one payment are punished much less, but those with multiple late or missed payments are hammered. In short, the restructured FICO calculation recognizes we’re all human.

Authorized user accounts have been removed entirely from FICO score calculations in the new methodology. These “piggyback” accounts occurred where a person with good credit would back another person, often a parent and child relationship.

Time is on my side said the old song. Well, it really is in the new FICO. The longer you have credit that is positive, the more it impacts your credit score. If you are a parent, establishing credit for your kids is a wise move. Just hide the credit cards.

I think, therefore I am. While this philosophical statement is true in a humanistic sense, your FICO score is proof of your being when it comes to personal finances. Make sure you understand how it works and what yours is before seeking financing.

Tags: Mortgages

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