By Sanyika Calloway Boyce
12 February 2008

A potential change in the way your credit score (a.k.a., FICO score) is calculated could well change your future credit history and lots of unhappy people are fighting the proposal. Fair Isaac, the company that invented the FICO score, has announced that a new credit formula called FICO 08 will take effect in the first quarter of this year.

The proposed change is the result of the increased use of a practice called "piggybacking." It is a form of credit renting that lets consumers improve their credit score by becoming an authorized user on someone else’s account, thus "piggybacking" on that person’s good credit history. Then, with a newly improved credit score, a person with bad credit can obtain a lower interest rate on a mortgage, get car loans or personal loans, and in some cases it helps him get a loan approved that would otherwise be denied.

While the practice of piggybacking should be stopped or at least curtailed, the backlash poses a big problem for you as a college student and a portion of the credit consumer population that has legitimately relied on the authorized user relationship to establish credit.

Some of you may have asked your parents to add you to one of their credit cards in order to help you establish a solid credit history. Your parents did so because they knew that the presence of an authorized user account would help you by allowing lenders to use their "seasoned" FICO score that is now attached to your credit history too.

Using your parents’ credit history is a great way to start building your own credit history, but that capability is being threatened. Although Fair Isaac claims the new credit scoring formula will only affect 30% of credit consumers, the financial industry estimates the percentage of consumers affected will be much higher. However, reports that consumer credit scores would significantly drop under the new scoring formula caused many experts in the business and financial sectors to predict that FICO 08 will never happen.

Ted Stearns, owner of TradeLine Solutions, is a vocal opponent of FICO 08 and gives two primary reasons for its unlikely rollout. The first reason suggests that the switch would not be a good business move. If FICO 08 is implemented, the three credit reporting agencies would report the exact same credit score for each individual. Currently, each agency comes up with a consumer’s score through different means; these varying systems allow each bureau to provide a different score from which lenders take the middle score.

The FICO 08 credit-scoring system would mean that all three agencies will come up with the same score. This would ultimately eliminate the need for three agencies to produce what one could do on its own.

The second reason that would stop FICO 08 is to avoid possible legal action against Fair Isaac. Since one major aspect of the new formula deals with redistributing credit consumers into 12 new categories (eight for people with good credit and four for people with bad credit) the new categories would reassign everyone a different score.

So while some consumers would see a slight increase in their score, most would see a downward change. This downward shift could ultimately cost a consumer hundreds of dollars a month on a mortgage, outstanding car loan or even existing credit cards. 

All that said, legal experts predict a civil action lawsuit on the horizon for Fair Isaac if it implements the suggested changes to the credit scoring software. In fact, VantageScore Solutions LLC has already filed a lawsuit against Fair Isaac, accusing it of using unfair and anti-competitive practices to harm the FICO brand. Despite the nay-sayers and financial experts who predict that the rollout will not happen, Fair Isaac maintains its intention to provide the new FICO 08 formula to all three credit-reporting agencies for full use this year.

Uncertainty is the only thing that is certain concerning the implementation of FICO 08. So what does all of this mean for you as a student and new credit consumer?  It means a need to become more credit conscious so you can make informed decisions.

Understanding how your credit score is calculated is a great place to start.

• Payment History: Tracks how consistently you make your monthly payments on outstanding credit; accounts for approximately 35% of your credit score.
• Current Debt Level: Calculates your total outstanding debt; accounts for 30% of your credit score.
• How Long You’ve Had Credit: Analyzes the length of time passed between when the accounts were established and now; accounts for 15% of your credit score. 
• How Often You Apply for Credit: Lists the number of attempts made to borrow money or open new accounts; accounts for 10% of your credit score.
• Types of Credit You Have: Separates each account into the secured or unsecured category; accounts for 10% of your credit score.

Whether FICO 08 is implemented in the coming months is clearly up for debate. Regardless of what happens, your focus as a credit consumer should be on keeping balances low, paying on time every time, keeping new accounts to a minimum, and limiting the number of new credit inquiries made on your account. Do this and you’ll be well on your way to staying financially fit.

Sanyika Calloway Boyce is the author of four books. She travels nationwide to educate, empower, entertain and enlighten students about money, credit and debt. This former debt-strapped college student shares real and relevant money messages that young adults can relate to and understand. Visit her online today at financialfitnesscoach.com.

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