If you enjoyed my latest post about credit scores, you'll probably also be interested in what I learned about upcoming changes to the Fair Isaac scoring algorithm. The algorithm is proprietary and exact details about the changes aren't available, but here's what I was able to learn in general:
- Updated FICO scores should start appearing within a few months
- The score range is the same (300 to 850)
- The same input criteria are used (indebtedness, payment history, number of recently opened credit accounts, type of credit used). See Credit Mantra's nice pie chart.
- The model will more accurately identify risky credit behavior and is projected to reduce credit default rates by between 5 and 15 percent.
Another interesting fact that I learned (and that many people may not realize) is that income is NOT a factor in determining the score. In other words, borrowers are judged on their willingness to repay (as determined by their past behaviors) and not their ability. I can validate this with our recent experience in trying to rent out our last house; we've encountered several applicants who were scored as untrustworthy, despite having very large incomes. It was surprising and a bit depressing.
Bottom line: An improved scoring model is great for everyone. Borrowers will have less opportunity to get themselves into trouble, and scores for people with good credit behavior are expected to go up! Good news for Frugalizers!