The new credit-scoring model recently introduced by FICO might actually make buying a house and moving out of that rental a little easier. It could also make it easier for some people to get a credit card. But, there’s one small problem – most major lenders haven’t really switched over and neither has the mortgage industry!
What’s the Situation?
The situation today is that millions of Americans have really good credit while millions more have really low credit scores. However, there are quite a few people that are stuck right in the middle with FICO scores that straddle that fine line between good and bad. An increase by just a couple of points could save them thousands of dollars a year while a slip could cost them even more in interest payments.
Your credit score directly affects your ability to buy a house or even get a credit card. The newest update of the FICO credit-scoring model will mean big changes for everyone, if the financial sector would go ahead and adopt it. This update is called FICO 8 and could slightly increase the credit scores of quite a few Americans. However, the model works both ways, and some people may find it more difficult to get credit. Some people won’t change at all.
What is FICO, Anyway?
If you aren’t familiar with what FICO is, you’re not alone. If you’re trying to move into a home of your own, you might be hearing more about it lately. Basically, FICO started back in 1956 as Fair, Isaac, and Co. – a system designed to help department stores and gas stations decide whether or not to open credit cards for certain customers. Since then, there have been some modifications, but the basic principles remain the same.
Your FICO score is a number assigned to you to help summarize whether or not you are a high risk for a lender. All sorts of industries look at the FICO score these days – car dealers, mortgage lenders, credit card companies, and other businesses that also extend some sort of credit.
What’s the Update Mean?
FICO actually updates its scoring model every couple of years. These updates are generally designed to account for new kinds of data available and differences in consumer behavior. The newest update involves a more precise analysis of the consumer because data shows that there are many different types of consumers out there.
The new credit-scoring model divides consumers into 16 different groups, instead of 10, and then compares them within each group. The score will determine whether they are a good or bad risk to the lender or whether they have the ability to repay.
If you want to get started on your next home purchase, you probably can’t wait for the lenders to start adopting this new FICO 8. But, it doesn’t look like things are going to start moving any faster. In fact, it’s called FICO 8 because they planned to launch it back in 2008 – here we are at the end of 2011 and it still hasn’t really hit the ground running.
So, it looks like we’re just going to have to wait and see how this works out.