May 8, 2009
In the old days, if you paid cash for everything and carried no debt, you were considered a great prospect for a mortgage or car loan. Fast forward a few decades and the rules have changed considerably.
Today, your ability to borrow is largely determined by your credit score, a three-digit number lenders use to calculate how likely you are to repay debt.
A new version of FICO, the most widely used credit-scoring formula, has begun rolling out. FICO is named for Fair Isaac Corporation, whose proprietary software is used by the three leading credit bureaus. Under the new version, FICO 08, weighting factors used to determine scores will change as lenders gradually adopt the new system.
FICO Public Relations Director Craig Watts explains, "As consumers' credit habits change, we adjust our scoring formula to more accurately reflect information found credit bureau records."
A few FICO 08 highlights:
If you maintain credit cards you seldom use, lenders may adjust their credit limits or close them altogether, thereby lowering your overall available credit – and possibly, your credit score. One strategy: Make occasional small charges on these cards so lenders will be less inclined to close the accounts. Just be sure to pay off balances each month, otherwise you'll defeat the whole purpose.
Because not all credit bureaus (and thus, their lender clients) are adopting FICO 08 at the same time, it may not always be apparent which factors are being used to assess your creditworthiness. However the following guidelines will always help you maintain a sound credit score:
Recent Practical Money Matters