FICO Facts

• The changes that have been scheduled to the FICO system are going to affect 60 million consumers - some 30 percent of those with credit reports.
• The FICO overhaul will likely have most impact on the scores of women, young adults, and those trying to re-establish credit by piggybacking off another's card.
• 40 of 50 top mortgage lenders in the US use FICO scores to determine interest rates and loan eligibility.
• Fair Isaac plans to change the system in response to complaints about abuse from the lending industry.

Source: StopFICO.com

FICO 08

The new scoring model that Fair Isaac is planning to roll out in September will be known as FICO 08. Very few details were released ahead of time about this new scoring system - Fair Isaac did not publish much about it for fear that someone would copy it - and as a result, most consumers were unaware that their credit scores could now be in danger.

Fair Isaac spokesman Chris Watts downplays the changes, saying that the new system should be more dependable for lenders analyzing the scores of higher-risk consumers and those with little credit history.

Whether FICO 08 will really prove more dependable for lenders is yet to be seen, but there's no doubt that it will have a major impact on credit scores across the country.

Instead of dividing the population into 8 segments with good credit and 2 segments with bad credit, FICO's new model will divide the population into 12 segments-8 with good credit and 4 with bad.

For those who already have good credit, this change won't mean much. But for anyone trying to establish or re-establish credit, the new system may well cause problems.

Another major change to the FICO scoring system involves the authorized user (AU).

Come September, being an AU on someone else's credit account will no longer be beneficial. Some estimated 60 million consumers (most of them spouses or students) currently 'piggyback' on other people's accounts as authorized users. This means that they can use these accounts and share their benefits when the main account holder uses credit responsibly.

John Ulzheimer, current president of Credit.com and former Fair Isaac manager, has gone on record stating that the FICO system's AU change will eliminate any benefit from being an authorized user, which will cause many scores to go down.

'While FICO's move has largely remained under consumers' radar screen, it's impact will be clearly felt when the changes start taking place in September, particularly among newly divorced women and the fresh crop of college students who will face new hurdles in establishing credit for the first time,' says Ulzheimer.

Why the Change?

The changes that Fair Isaac will be making to their model are largely in response to complaints made by the lending industry and by trade groups including NAMB (the National Association of Mortgage Brokers) claiming that authorized users are undermining the system.

Most of the complaints about 'piggybacking' center on the practice of people renting good credit from third party services - a practice that has been increasing in popularity.

There are quite a few companies out there already that act as middlemen between people with good credit who are looking to make money and people with bad credit who are looking to boost their scores, and more services of this type seem to crop up every month.

The cost of renting credit varies by service. Most services charge anywhere between $300 and $3,000. Sound expensive, but consumers using these services may be able to boost their scores by up to 200 points in a very short period of time.

A shady practice? NAMB says yes.

'We believe renting the credit history of an unknown or unrelated individual...to obtain a lower interest rate loan is an unethical practice,' said NAMB President Harry Dinham. 'This practice defeats the purpose of credit scores.'

How Will This Change Affect Mortgage Loan Availability?

If credit scores do begin to drop in September as has been predicted, mortgage borrowers are going to feel the impact. Lenders have already been tightening their credit standards in response to problems in both prime and subprime sectors. Lower credit scores are bound to leave many borrowers out in the cold.

There is also a chance you may receive a rejection simply because you're an authorized user on someone else's account. According to an article by OriginatorTimes.com, there have been unconfirmed reports around the country that loans containing authorized user trade lines are automatically rejected by several major mortgage lenders.

What Can Consumers Do?

If you're an authorized user on someone else's account and want to maintain this, the best thing to do is to become a joint account holder. This could be the only loophole left once the FICO model changes.

If you disagree with the proposed overhaul, you can also sign one of the petitions currently circulating on the web. One such petition can be found at StopFICO.com.