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