http://articles.moneycentral.msn.com/Banking/YourCreditRating/weston-5-ways-to-kill-your-credit-scores.aspx?page=1

Essentially what happened was FICO simulated the impact of a variety of credit behaviors on FICO scores of both 680 and 780.  This is layed out in the below chart: 

Unfortunately, this information is not entirely correct.  It holds true for some cases, but it leaves out some very important points.  What FICO did not disclose and the article does not convey is that four of the five actions listed above will cause your credit file to be scored in a new scorecard!

FICO scores measure your credit file’s potential risk by scoring it using a unique algorithm specifically designed for your file type, called a scorecard. That means if you have a bankruptcy then you’re scored in a bankruptcy scorecard. If your credit file only has one or two accounts then it’s scored in what’s referred to as a thin file scorecard, and so forth and so on.

Point being, all of our credit files are not scored the same way AND not all are scored using the same FICO formula. Four of the five actions above are negative. And, when a clean file suddenly is hit with something negative it will go from essentially a “clean credit file” scorecard to a “derogatory file” scorecard. The result is a completely different measurement for EVERYTHING on your file. So adding a foreclosure or a settlement or a 30-day late payment or a bankruptcy to your credit file doesn’t “cost” it the points you see above. It causes everything on your file to have a new value so the score change can’t be attributed just to the negative item. The score change has to be attributed to the change in scorecards.

Point differences for the exact same action on the exact same FICO score can be anything but exactly the same. John Ulzheimer, one of the creators of the FICO score, re-interviewed FICO’s Public Affairs Director, Craig Watts. He was able to confirm from Watts that the examples in the FICO chart were “hypothetical” and “could vary significantly” from consumer to consumer. You can Ulzheimer’s his full article here.

http://www.credit.com/news/experts/2009-11-29/real-fico-score-damage-point-amounts-clarified.html

In summary, not all credit scores and scorecards are created equally!  Be careful what you read out there!

FICO scores are created to be as objective as possible.  According to the Equal Credit Opportunity Act, lenders cannot use this type of information when issuing credit.  The scores do not consider your race, color, religion, national origin, sex or marital status. Other factors not considered are your age, your salary, occupation, title, employer, date employed or employment history.

According to Fair Isaac Corporation, “independent research has shown that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.”

 1)   You have a new credit law, The Credit Card Accountability Responsibility and Disclosure Act of 2009, which partially became law in August 2009 and will completely become law in either February of 2010 or December 1, 2009 if Democrats have their way.

2)   You have a new FICO® score, FICO 08, which is now live and commercially available at all three of the credit reporting agencies. This new FICO score promises to do a better job of predicting future credit risk.

3)   You have millions of credit card holders who have seen their credit limits reduced, accounts closed, interest rates increased and/or their minimum payment requirements increased.

4)   In addition you have billions in lost home equity, which means no more safety net for those consumers who have excessive credit card debt.

5)   You have debt settlement companies aggressively marketing their services like vultures circling a dying carcass without fully disclosing the downside of possible lawsuits and severe credit damage to their customers who use their services.

6)   And finally, you have media and the undereducated that are spreading fallacies about the credit world, and are causing panic.

All in all, it’s a tough environment to survive and thrive in. Here are what I believe are the most important things that we consumers should be focused on over the next 24 months:

• Continue to Improve Your Credit Scores
  • Continue to make your payments on time regardless of what you read or hear – Debt settlement companies would have you believe that the best way to serve you is to suggest that you stop making your payment to your credit card issuers. The theory is that a lender who isn’t getting paid might be more flexible for a consumer who isn’t making their payments. I guess it’s the “I’m lucky to get something” hypothesis. The problem is that many credit card issuers will gladly work with their debtors and work out settlements or payment plans directly, without the intervention of debt settlement companies.
    This helps them to collect more than what they’d get from a 3rd party settlement company and it will also mean that you are paying them more of what you owe them, which is a good thing. It will also protect you from litigation should the credit card issuer grow tired of you avoiding them at a debt settlement company’s request.
  • Pay down your debt to no more than 10% - The new FICO score, FICO 08, is more sensitive about your revolving utilization percentage, which is the relationship between your balances and limits on credit card accounts. This means those of you who are highly utilized will suffer more as lenders continue to convert to this newer credit score, and many have already made the switch.If you can’t get your balances to less than 10% of your credit limits then get them as low as possible and your score will benefit. Why is this important? It’s simple. Lenders are being more critical about credit scores than in the past 36 months. A good score, say 700, two years ago would have gotten you approved at their best deal a lender had going. Today it will get you approved but not with the best terms. Shoot for 750 to ensure you of the best terms. And, be aware that mortgage lenders not only want 750 but they also want a larger down payment in many cases.

• More Cards Are Better, Shoot for Five –This is counter intuitive but we’re living in a bizarre credit world. Those of you who have less than five credit cards are in a bad position. A bad position because of a couple of reasons, which are:
  • You have fewer options if one of your credit card issuers changes your terms – Tens of millions of consumer have seen the terms of their credit card accounts changed adversely over the past 18 to 24 months. This means lower credit limits, higher rates, higher minimum payments and closed accounts in some cases. If you have only one or two cards then you leave yourself without options should one or more of your credit card issuers start misbehaving. And for those of you who think you’re immune from this because you have good FICO scores, think again. FICO released a study several months ago that showed that, at a 2 to 1 ratio, cardholders who saw their credit limits decreased had median FICO score of 770. Nobody is immune.With more cards you give yourself the option to move your business elsewhere and not lose the access to the capital that a credit card provides.
  • Think About Litigation If You Know You’re Right –
    Fair Debt Collection Practice Act (FDCPA) lawsuits are going to eclipse 8,500 this year, which will easily be a record. According to John Ulzheimer, a professional expert witness, “many consumer are finding that they can’t get legitimate errors corrected on their credit reports. The choice they have is to live with it for seven years or take someone to court and force them to listen.”Many collection agencies are finding it hard to avoid lawsuits despite a huge growth in outstanding delinquent receivables. Some are calling for a revamping if the FDCPA but any politician that chooses to reduce consumer protections at this time in history is asking to be voted out of office.

The lawsuit filed by FICO against Experian, TransUnion, and VantageScore Solutions has been partially dismissed, but will likely continue later on this year. In addition, FICO announced that FICO 08, its most recent credit score will be available in all three of the credit reporting agencies in August 2009! This means that Experian has agreed to finally install and provide credit scores (several months after Equifax and TransUnion have.)

How is FICO 08 different than the old FICO?

1. Consumers who have a large amount of credit card debt or are highly utilized will likely see lower FICO 08 scores. This is because of the added importance of credit card debt built within the model.
2. Authorized Users:  Adding yourself onto the credit card of another person in an attempt to “piggyback” your way to a better score will be impossible sooner rather than later.
3. Benefits! A benefit to consumers is FICO 08’s logic, which ignores very low dollar collections, commonly referred to as nuisance collections. Consumers who are seeing their scores lowered by collections with an original amount less than $100 will see immediate benefit with FICO 08.

Now it’s just a matter of time before banks and lenders accept and start implementing the new models….it looks like momentum is building and hopefully won’t take too long.

1. The FICO Mortgage Score – This score is actually a variation of the FICO score currently available at Equifax, which is called BEACON. This new score, which comes at the request of players in the mortgage industry, is meant to give them a better understanding of credit risk posed by mortgage borrowers rather than just general credit risk across all different types of accounts. This new score is what’s referred to in the credit scoring industry as an “Industry Option” score. The Industry Option score uses the standard FICO score as a foundation and then adjusts that score up or down based on the consumer’s credit risk for a specific type of loan, in this case a mortgage loan. So, for example, if my FICO score at Equifax is 750 but I’ve managed my previous mortgage loans very responsibly it is likely that my mortgage score will be slightly higher. This is because I actually pose less risk to mortgage lenders because I’ve exhibited that I can manage mortgage debt based on previous experience, which is displayed on my Equifax credit report. This score will be available some time in April.

2. The FICO Auto Score – The industry option scores do not stop for just mortgage lenders. There is actually an entire suite of these scores available for other lenders as well. They are available for credit card issuers, auto lenders, personal finance lenders and installment lenders. TransUnion will be making the FICO Auto Industry Option score available immediately to lenders who loan money to consumers who are buying a car, new or used, or are refinancing an existing car loan. The new auto score is expected to easily outperform the previous auto score version at TransUnion. According to FICO, “auto lenders may be able to identify as many as 5 percent to 15 percent more potential delinquencies among consumers as they could with the previous FICO auto score.” This increased predictive power will help to accomplish two things sorely needed in the auto-lending environment. First, it will allow lenders to loan more money into a dying auto market. And second, it will allow healthy auto lenders to loan deeper into the credit score pool because of the increased ability to identify the future bad accounts before they even make it to their books.

3. The FICO Bankcard Score – In addition to the auto score available at TransUnion FICO has also made available it’s newest Industry Option score designed specifically for credit card issuers. This new score, called the Bankcard Industry Option, does the same things as the mortgage and auto versions, which is to give credit card issuers a better crystal ball to use when making decisions about whether or not to approved or deny credit card applications and whether or not to modify the terms of an existing credit card customer’s account. It’s my belief that of all of the industry specific scores, this is the most commonly used. According to FICO this newer score will also do a better job of identifying riskier credit card users than the previous version of the same score. According to FICO, “…testing found that the new scores could potentially increase issuers’ delinquency prediction rates by 6 percent to 12 percent…” This is a significant improvement especially when you apply the average loss of a credit card account for a major credit card issuer who might have 30 million active credit cards in circulation.

One of the biggest hurdles to implementing one of these new scores is the work to accommodate a new, different scoring model. This is one of the reasons VantageScore, a product of the credit bureau’s joint venture VantageScore Solutions hasn’t done well. It’s a different score with a different score range and likely performs very differently than a FICO score.

In order to make the transition from previous versions of FICO to these newer scores as painless as possible FICO has done a good job of keeping the structure of the newer scores identical to that of the older versions. The score range is still 300 to 850. And the new scores maintain the same set of adverse action codes, also commonly referred to as score factor codes or reason codes. They have also maintained the same minimum scoring criteria, which means if a bank has traditionally seen a 2% “no score” rate, they should continue to see the same.

FICO releases a new generation of scoring models every few years for each of the three national credit reporting agencies; Equifax, Experian and TransUnion. And in most cases it doesn’t make the headlines when it happens. Given the current state of the economy and especially the credit environment any time a newer better score becomes available it seems to draw more attention. This probably won’t change any time soon.

FICO 08 will eventually be the industry standard credit score despite not being available yet from Equifax or Experian. We should see FICO 08 at Equifax before the fall and at Experian as soon as they start losing customers to TransUnion or Equifax. Experian has alluded to the fact that their ongoing litigation with Fair Isaac over VantageScore is causing some stress in their relationship and delaying the roll out of FICO 08. The problem is eventually lenders are going to get sick and tired of getting caught in the middle of the “Experian versus FICO” arm wrestling match and move their business elsewhere when they find out that Experian isn’t offering the new gold standard credit scoring model. When that happens you will be able to time the FICO 08 implementation at Experian with the second hand on your favorite watch.

So what is so different about FICO 08 and the other versions of the FICO score? There are three primary differences of note. They are:

1. Negligible Collection and Public Record Exclusion – The newest FICO score will ignore any collections or public records with an original amount less than $100. It’s important to note that for a collection to be bypassed by the score, thanks to the new logic, it has to be reported as a 3rd party collection agency account and not the collection department of a credit card company. If the collection shows up as “trade” then it will still count against your score even if it is less than $100. And, if the original amount was over $100 but it has been paid down to a current balance of less than $100 it will still count in your score. This is exceptional news for consumers who are haunted by low dollar collections caused by misdirected final utility bills and some insurance snafus.

2. Credit Card Utilization – Credit card utilization, the ratio of your current balances to your current credit limits on revolving credit card accounts, remains a highly important factor in your FICO credit score. However, in FICO 08 it takes on a whole new level of importance. Consumers who have balances that approach the reported credit limit will find their scores lower with FICO 08 than with previous versions of the scoring software. FICO’s research has apparently discovered that consumers who are highly utilized with their credit cards are more risky than they were in the past, hence the more punitive treatment.

3. No Piggybacking Allowed – This new version of FICO apparently has the ability to determine if an authorized user credit card account is an attempt to game the credit scoring system through piggybacking, which is the process whereby a consumer with poor credit would pay to be added to the credit card of someone with good credit as an authorized user. Fair Isaac will not disclose how they’re able to tell the difference between a legitimate authorized user account belonging to, say, a husband and wife versus one that has been made it to a credit report through other means, such as piggybacking. You will recall that FICO 08 was originally going to completely ignore all authorized user accounts. This new logic seems to split the difference between ignoring all authorized user relationships and doing nothing to discourage the use of piggybacking services.

So why does FICO 08 pose a problem for VantageScore? It’s actually quite simple. As long as FICO keeps improving what they refer to as their “classic” risk scores the less compelling it is for a lender to test, let alone switch, to a new score brand. Implementing a new version of FICO is much easier than implementing a whole new scoring model, like Vantage. In fact, a company called SubscriberWise has already implemented FICO 08 not more than two weeks after it became available.

The best advice for consumers who will begin to be scored with this new FICO score is for them to continue to do what they’re doing now. Continue to make all of your payments on time. Continue to work down your credit card balances as much as possible. Continue to apply for credit only when needed. If you can do all of these things then your FICO 08 score will be solid as a rock and, who knows, maybe your VantageScore will be solid too, although nobody will care.