FICO score change to impact bad credit consumers

By Jeremy M. Simon

Fair Isaac Corp.'s recent decision to update the formula used to calculate its FICO credit score could impact consumers with bad credit.

The FICO credit score is widely used by banks, credit card issuers, mortgage brokers, landlords and insurers to help conclude whether consumers looking to borrow money represent a good risk.

Fair Isaac says the changes will improve the accuracy of its credit scores by 5 percent to 15 percent, especially among borrowers with bad credit due to missed payments and those with little credit history, such as immigrants and young people.  These FICO score revisions will take effect in September 2007.

To rank consumers on a scale between 300 and 850, Fair Isaac looks at credit histories supplied by Equifax, Experian and TransUnion, the three major credit reporting agencies.  Consumers with higher credit scores often qualify for lower interest rates, while those with bad credit may pay higher rates or even be denied for a loan.

Despite the upcoming changes to how scores are calculated, Fair Isaac said that the scale will remain the same.

Fair Isaac noted that it has continually redeveloped the scoring model, with the latest changes unrelated to a surge in the number of consumers with bad credit who are defaulting on their mortgages, as some analysts have speculated.

Although the changes should improve accuracy, Fair Isaac explained that the majority of consumers will see little change to their credit scores.  While some consumers could get a slight boost to their scores under the new formula, others may suffer a small dip.

The primary reason for the change is to help lenders keep up with the ever-changing dynamics of consumer credit behavior, Fair Isaac noted, since small differences can be significant to lenders.

Published: May 21, 2007

	Three most recent Credit scores, credit reports stories: Consumers are getting smarter about credit scores – Baffled by your credit scores? You're not alone. The majority of consumers still get confused by what actually goes into a credit score, according to a recent survey. However, the number of people who are completely in the dark is on the decline ... Is your doctor checking your credit report? – A growing number of health care providers, including hospitals, surgeons, dentists' offices and fertility clinics, are checking patients' credit. And some consumer advocates are crying foul ... The truth about 7 common credit report myths – Credit bureau experts detail the most common misconceptions consumers have about their credit reports and clarify them ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!