Credit and Debt Blog

Fair Isaac Corporation is continuously tweaking their FICO credit scoring models to more accurately predict consumer risk. They also want to cater to the needs of lenders that buy these scores.

In doing so, it is important to let consumers know how these changes will affect them. Here are the newest revisions:

Old Debt Payoff Penalty

Credit counselors have made a habit of informing consumers that paying off old debts could adversely affect their credit scores. Up until around August 2007, this was absolutely true.

As ridiculous as it sounds, your score could actually drop for paying off an old collection account that was aged from 4 to 7 years. The reason was that it brought it back into your current payment history, which was weighted higher than old debts.

Debt collectors were upset that consumers were penalized for paying off old bills. They wanted to provide a consumer an incentive to satisfy old debt obligations.

Fair Isaac Corporation finally acquiesced, reasoning that paying off an old bill was an act of financial responsibility by a consumer that should not trigger a punishment. As a result, consumers are now no longer penalized for paying off an old debt. That being said, debts older than the statute of limitations should be paid off in lump sums, not according to payment plans.

Single 30 Day Delinquency

In previous scoring models, FICO harshly penalized even a single delinquency. While consumers should expect score reductions for late payments, some consumers experienced sharply reduced scores even for one 30 day delinquency.

Consumers can still expect their score to sharply drop if it shows an existing 30 day delinquency. However, once the delinquency has been cured, the lasting effects on their credit scores should diminish more so than in previous scoring models.

Fair Isaac has incorporated various factors that may not necessarily signal higher risk. Included are lost statements, forgotten payments, life events or other reasons that could indicate an isolated oversight rather than financial distress. The result is that isolated delinquencies will be less detrimental on a long-term basis.

This change is one of many incorporated into an updated scoring model sometimes called FICO 08. There is another significant change also included in FICO 08.

Authorized User Piggybacking

As a result of lender complaints due largely to abuses in authorized user status, Fair Isaac eliminated an input in the scoring models altogether that will have a major impact on those seeking their first credit accounts. FICO scoring models will no longer account for authorized user accounts.

What this means is that only primary coapplicants can be recorded in credit reports. Authorized users will not be given any credit for the accounts, since they do not share in the legal liability of adhering to card holder agreement terms.

Substantial abuse arose in 2006 and 2007 when companies learned to exploit this vulnerability in the scoring models. For a fee of several hundred dollars, consumers looking for additional points could piggyback on someone else’s good credit by becoming an authorized user on a seasoned credit account.

Lenders demanded a change, as thousands of consumers were receiving major reductions in mortgage interest rates because of their artificially improved credit scores. Fair Isaac agreed, and included these changes in a rollout that eliminated the practice in all 3 major credit bureaus within a year.

More changes are yet to come. Bookmark this site for future updates.