2015 FICO Scoring System ChangesValley Auto Loans » Articles » Personal Finance » 2015 FICO Scoring System Changes Previous Next Last Updated On: October 26, 2016
Your FICO Score
- 1 Your FICO Score
- 2 How the Old Method Worked
- 3 Why the Old Way Is Not Perfect
- 4 A New Scoring System
- 5 Effect on Those with Scores
The FICO score is the way that lenders evaluate the risk level when deciding whether to loan you money. A high score means that you pay your bills on time and that you are not spread too thin financially. A low score means that there’s a greater chance that you’ll default on your payments. But what about a score that is not accurate or different than what you think it should be? In many cases, the scoring system works out well, but millions of Americans do not have accurate credit scores, ether because they do not currently use credit or the system looks at their credit use differently.
Fortunately for these people, FICO is trying to even the score a bit, helping these people to get the credit they need for a mortgage, auto loan or new credit card. Credit agencies are now looking closer at your residence history and payment of utility bills to establish your ability to pay debt.
How the Old Method Worked
Under the old style, only certain types of companies are reporting credit history to the three credit bureaus – Experian, Equifax, and the Trans Union. These are credit card companies and banks or credit unions who report on mortgages, student loans, and car payments. With an installment loan, the company will report the original loan amount, and how often the payments are made on time. The loan information will stay on the credit report even after the loan has been repaid in full along with any late or missed payments. Credits cards show revolving credit, and they’ll list the available credit limit, along with how much of that limit the consumer is using and whether he is making on-time payments.
According to MyFICO.com, 35% of the credit score is based on whether payments are made on time. Moreover, 30% of the score is based on the debt to credit ratio, or how much of the available credit the person is using. 1 Thus, it is best always to make payments on time and to try to keep credit use levels down. The length of credit history, whether there is a new account and the types of credit in use also play a role in the determining the credit score, have less importance.
Why the Old Way Is Not Perfect
The traditional method of creating credit scores works very well for the people who use credit. However, when there’s an individual who does not use credit, the companies are not sure how to rate them. This means that the person will end up with a low score, and it becomes hard to build up the credit score. He may need to pay money for a secured credit card, just to be able to get better deals.
Not having a good credit score does not mean that the person is financially irresponsible. It is likely that the individual is just living within his means. He probably pays his rent and other bills on time, using a checking account, cash or a debit card to make purchases at stores. He may even have a sizable savings account to use in case of emergencies.
This lack of a credit score can hold him back in many ways. Not only will it be difficult for him to get a mortgage or an auto loan, but it can also be hard for him to find a place to live and get a job. Landlords typically use credit scores to make a decision about whether to rent to a person and will choose someone with a high score rather than someone with a low score. Some employers check credit history check before offering employment. These people may look directly at the low credit score that the applicant has, not considering the reason for the low score.
A New Scoring System
Obviously, there’s a big difference between someone who has a bad credit score because they do not make payments on time, and someone who has a bad credit score because they do not use any credit and budget their money. The FICO scoring system is starting to take this into account.
The new scoring system uses data from a variety of utility companies, including phone and cable companies. According to CNN Money, the data for this will come from the National Consumer Telecom & Utilities Exchange, which is maintained by Equifax.
The other thing that the new score system uses, is how often a person is moving or has moved. These property records will come from LexisNexis Risk Solutions. Most likely, the credit bureaus views staying in the same home for several years to be favorable.
Effect on Those with Scores
The new credit scoring system is aimed at trying to build a credit worthiness rating for those people who typically operate outside of the usual credit system and depend on special financing programs. Naturally, those who already do have good credit scores may worry about how the changes could affect them.
Fortunately, a response from a FICO representative told Credit.com that there would be no effect for those who have traditional scores. Those who use credit will be graded using the traditional method. 2
Why does my credit score look different if I apply for an auto loan?
Dealers and auto loan lenders can get a copy of what is called an Auto Enhanced Scoring Option. This report is mainly used by dealers and lenders reviewing a person’s credit history in regards to how responsible they were with previous auto loans. This report will give then a separate score for their auto loan history, showing all loans, terms of payments, delinquent payments, loans not paid in full or payments sent to a collection agency.
This report is designed to help the lender make a more accurate prediction of the applicants ability and willingness to pay back the loan.
The Goal of the New System
The goal of the new system is to help those who have low credit scores due to not using credit, start building up their scores to levels where they can easily qualify for loans. The new system does address this problem for many, but it is not a catch-all solution. For example, not all of the utility companies report to the National Consumer Telecom & Utilities Exchange. If a consumer has the unfortunate luck of dealing with a business that doesn’t report, they will still not be building up their credit score.
Tracking Moving Habits
Tracking people’s moving habits can also be troublesome, There are legitimate reasons people change their home address often. For example, a college student might live at her parents’ home every summer but move to a new apartment after going back to school. Some people have jobs that require frequent moving or are in the military. It is not fair for these types of people to be penalized for their moving habits.
An Excellent Change
Ultimately, this change in the scoring system is an excellent start to making sure that more people have access to the credit they need. Individuals who have been held back by the lack of credit history will now be able to get ahead. However, it is still important to look into your credit report now and then, no matter where the data is coming from. Mistakes happen all the time, and you would not want your credit to take a hit for a mere mistake.
I Can’t See My Automotive Enhanced Score
The automotive enhanced credit score is made available to dealers and lenders and is not easily accessed by the public. If you have had a bad experience with an auto loan in the past and you think your credit score will be lower than you think, there are ways to see your report. but you will have to pay for the reporting agency to give you a copy.
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Sources and Citations:
- http://www.myfico.com/crediteducation/whatsinyourscore.aspx ↩
- http://blog.credit.com/2015/04/new-fico-score-factors-in-utilities-how-often-you-move-113098/ ↩