There have been some recent changes to the FICO credit scoring system. These are the biggest changes since 1989 and it is estimated that these changes could cause as many as 40% to 50% of all scores to go up or down by as much as 20 points. That could mean the difference between getting approved for a loan and getting denied, especially in the current economy and credit crunch.
One of the most positive changes to be made with FICO scoring is the fact that a single late payment will not damage your credit rating as much as it used to. The scoring algorithm will take into account your late payments and your score will be affected on a sliding scale. One late payment will not affect your score too much but being habitually late will greatly affect your score.
Another issue that has been addressed is that of “piggybacking”. Piggybacking is when a person becomes an authorized user on someone else’s credit card accounts, thereby allowing them to establish some credit with the help of someone else. Piggybacking is still authorized with the new credit scoring system, however, the new system has some elements in place that will make it more difficult take a longer time to establish credit.
For creditors, the new FICO score is purported to be able to reduce the risk of delinquencies and improve the predictability of defaults by 5% to 15%. The recent downturn in the economy has created more delinquent credit accounts than at anytime since 1992, when the country was also in a recession.
Credit scores are also becoming increasingly important for consumers. Right now they are being used for typical and expected uses of applying for credit, but in addition some insurance companies are now using them for underwriting purposes. There are also increasingly more employers that are starting to use credit scores in their hiring processes.
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