Credit Scores ready for Change

Change was promised repeatedly during this year's Presidential campaign.  In the land of consumer credit, change is definitely going to occur.  In the spring of 2009, two of the three credit bureaus will switch to a new credit score.  It's hoped that the change will make a person's FICO score a more accurate assessment of risk.

On the heels of the subprime mortgage meltdown, sweeping financial reforms have been proposed throughout the country.  One place where reform will occur is with Fair Isaac Corp., the developer of the FICO score.  The model from which consumer credit is evaluated will change, and a person's credit rating will be tweaked to assure a more accurate risk assessment.

Good timing for consumer credit

The timing couldn't be better for the credit market, which has grown hesitant to lend money in these recessionary times.  Feeling burned by the subprime market crash, lenders want assurances that the credit score they use to assess a potential borrower is accurate.

Fair Isaac believes it will be.  It has increased the number of groups used to classify people from 10 to 12, which is an acknowledgement of the number of different credit problems that exist in the marketplace.  The new FICO system is designed to be more forgiving of people in particular cases of bad consumer credit.  If someone is habitually late on his payment, for example, he'll have a different score than someone who's having temporary credit problems.

Other FICO changes

Credit scores will include other changes, as well.  In the past, a FICO score tended to concentrate on the number of open accounts a person carried.  Under the new system, emphasis will be placed on the amount of money a person carries in those accounts, an indication that debt will be more closely scrutinized than ever before.  This will obviously be of benefit to the banking industry, which seemed to ignore debt ratios as they blithely dumped credit in the laps of consumers in recent years.

The practice of piggybacking to raise your score will be limited, too.  In the past, a young person could create her own credit history by assuming and paying off a parent's established account.  Spouses also used this practice to raise their own scores, benefiting from the higher scores of their partner.  The new FICO score will now require people to build their own credit histories.

With the crumbling economy and a weakened financial infrastructure, the need to reevaluate lending practices is a top national priority.  Lenders will applaud the new credit scoring system, which should provide for a more accurate assessment of a person's credit worthiness.  But this revamping of the FICO system doesn't change the fact that a credit score is still a tool.  It's up to the lender to make a sound, rational decision as to whether or not to extend a loan.  If they revert back to the freewheeling lending practices that took place prior to the subprime crisis, this country's credit troubles will begin all over again.