Partners (Number 2, 2008)

New FICO Model Changes Approaches to Consumer Credit*

father and son with different FICO scores holding credit card The Fair Isaac Corporation is making changes to its FICO credit scoring model that will affect not only consumers' credit scores, but also how people go about establishing credit.

The shift comes in response to recent jumps in credit card and auto loan defaults. In the fourth quarter of 2007 delinquencies rose to their highest level since 1992 according to a statistics from the American Bankers Association.

FICO 08, as the new model is called, will recalibrate the impact of payment delinquencies on credit scores. The goal of the revision is to offer better predictions of the likelihood a customer will fail to repay consumer loans. Fair Isaac estimates that companies switching to the new system will cut default rates by 5 to 15 percent.

These modifications represent the fifth overhaul to FICO standards in its 20-year history. Established in 1956, the Fair Isaac Corporation is an industry leader in credit score modeling, decision management platforms, fraud detection, and credit scoring services. About 90 percent of all large lenders rely on FICO scoring models in addition to other scoring models when making decisions about credit applications.

Figuring Your Credit Score

Fair Isaac is changing how it figures your FICO credit score. Here are some hypothetical examples of how the changes could affect scores:

Scenario 1
Alicia and Jose, higher risk consumers, each have 10 accounts and at least one major account delinquency. Their current FICO scores are 625.

FICO 08 Change
Alicia's score rises to 650. Jose's drops to 600.

Why the different outcomes?
bullet image More of Alicia's accounts are open and in good standing. She also has a mix of credit types.
bullet image Jose has more accounts that have been closed, and a narrow mix of credit types.

Scenario 2
Isabel and Fred are active credit seekers, with as many as 20 accounts each. Their FICO scores are 725, considered prime.

FICO 08 Change
Isabel's score rises to 745. Fred's drops to 705.

Why the different outcomes?
bullet image Isabel uses less of her available credit and has nearly paid off an auto loan. She applied for credit more often, but FICO 08 penalizes her less for this.
bullet image Fred carries higher card balances and hasn't made much progress in repaying an auto loan.

No more credit boost for authorized users
Recent changes to the FICO scoring model will no longer recognize authorized user accounts in determining an individual's credit score. Previously if a parent, say, wanted to help a college student establish a good credit rating, the student could be added to the parent's account as an authorized user and benefit from the parent's good credit. The new model will prohibit an individual from receiving a boost in their credit score by being an authorized user on an account that maintains a good payment history.

This shift came partly in response to a credit-repair strategy known as "piggy backing," which allows individuals with damaged credit to sign onto accounts of those with excellent credit. For a price, a consumer with a checkered credit history could use this strategy to improve his or her credit rating.

Loss of the authorized user strategy will make it harder for family members to help build a credit history for a child, spouse or others in the household who would benefit from this approach. The lack of a solid credit score typically influences the cost of credit, vehicle insurance rates, utility deposits and employer hiring decisions.

While the affected consumers are now faced with building their credit history from the ground up, having a joint account to build a credit file remains an option. However, joint accounts come with additional risk because both consumers are equally liable for the debt. Also, the only way to remove a joint holder from the account is to close it.

"Piggy backing" makes rating credit harder
Authorized users on credit accounts traditionally have been family members assisting other family members to build or improve a credit file through leverage of their good payment history. However, in recent years, credit repair companies have turned the authorized user system into a loophole for those with poor credit ratings by selling the trade lines of a consumer with good credit history to a consumer with bad credit history. This practice, which involves individuals who don't know each other, is called "piggy backing."

To illustrate, a credit repair company would arrange a rental transaction in which a consumer purchases the right to become an authorized user on accounts with good credit, thereby artificially boosting their credit scores. In many cases, such a rental transaction would raise a credit score more than 100 points.

The individual who rents the trade line is paid based on the quality of their credit. The arrangement does not allow the authorized user to make purchases on the card nor does the authorized user have access to any of the personal information associated with the account. After a couple of months, the owner of the trade line removes the authorized user from the account and resells it to another individual with problem credit.

man, credit card and dollar signNational Average PLUS Credit Scores

According to Experian, the national average credit score is 692. Only 13 percent of the nation's population boasts credit scores above 800, while 15 percent registers a credit score below 500. About 58 percent of the U.S. population has a credit score above 700.

PLUS Credit Score Below the National Average

Texas 666 Mississippi 671
Louisiana 672 Nevada 672
New Mexico 676 Georgia 676
South Carolina 673 Alabama 678
North Carolina 680 Oklahoma 681
Arizona 682 Arkansas 682
Washington, D.C. 682 Florida 685
West Virginia 685 Kentucky 687
Tennessee 687 Alaska 688
California 691

PLUS Credit Score Above the National Average

Missouri 693 Michigan 694
Colorado 695 Delaware 695
Indiana 695 Ohio 696
Maryland 697 Illinois 698
New York 698 Kansas 699
Utah 699 Virginia 700
Oregon 703 Wyoming 703
Pennsylvania 704 Idaho 706
New Jersey 706 Rhode Island 706
Washington 706 Maine 707
Hawaii 708 Connecticut 709
Iowa 711 Nebraska 712
Wisconsin 712 Montana 713
New Hampshire 713 Vermont 713
Massachusetts 715 North Dakota 717
South Dakota 718 Minnesota 721
Source: Experian, Oct. 2007

Credit repair companies have advertised that those with excellent credit can make as much as $10,000 per month for renting their trade lines for 90 days, according to a column by Kenneth R. Harney in the June 15, 2007 edition of the Washington Post.

The Fair Credit Reporting Act and privacy laws prohibit lenders from finding out additional information about authorized users on accounts, so it is difficult to distinguish legitimate authorized users from credit repair customers. FICO 08 will stop piggy-backing schemes from distorting credit ratings.

Changes brought about by FICO 08 will also affect how the scoring agency accounts for delinquencies. Individuals who are late with their payments—especially those who are more than 90 days late in making a payment on an account—will see a change in how the credit scoring model views the associated credit risk.

FICO 08 will be more forgiving to those who are delinquent on one account but current on all their other accounts as opposed to those who show patterns of late payments in multiple accounts. According to Fair Isaac, consumers may experience a 20 to 25 point adjustment to their credit score.

Impact on consumers
Besides the effect on children who would benefit from the help of a parent in building credit, women are likely to feel a disproportionately negative impact. According to a survey conducted by John Ulzheimer of, women are more likely than men to be designated as an authorized user. As noted, a joint account is a mitigating option. Also, secured credit cards and subprime (risk-priced) credit products can help consumers build credit history.

In addition to assessing delinquencies differently, FICO 08 will bring about other shifts in how the credit score is calculated. Applying for new credit accounts may hurt less. Having high balances on credit cards could hurt more. Actively using existing credit accounts may be important. Having both revolving and installment accounts may help credit scores because the new formula accounts for how borrowers manage various types of credit.

The new FICO formula is designed to distinguish the degree of risk among consumers with troubled or thin credit histories, those who are actively seeking credit, and "piggy backers." According to Tom Quinn, Vice President of Global Scoring Solutions for Fair Isaac, overall more consumers will see their FICO scores decrease slightly than will see their scores increase.

Implementing FICO 08
In 2006, VantageScore Solutions LLC, a joint venture between the three major credit reporting agencies, implemented VantageScore to compete with the FICO scoring system. The FICO 08 score is scheduled to be available at TransUnion for customer testing by the end of January 2009 and at Equifax by second quarter 2009.

Additionally, some lenders may take more time to test the system to see how it works with their business model and loan portfolios. In many cases, implementation can take 12 to 24 months.

This article was written by Sibyl Slade, regional community development manager at the Atlanta Fed.

* Since the original release of this article, Fair Isaacs has modified the FICO 08 model. For more information visit