March 4, 2008 - Credit scores are nothing new. ACCESS has been saying for years that credit scoring doesn't work, but that has had little effect on whether or not companies use the scores to grant credit. Finally last year, FairIsaac - the company that provides the most commonly used credit scoring system called FICO - had to admit that its system was broken and open to manipulation. But did they scrap credit scores completely? No. They invented a new score called FICO 08. And from what we can see, this score is no better than the old one.

FICO credit scores range from a low of 350 to a high of 850. The higher your credit score is, the less you have to pay in interest when you take out a loan. A low FICO score can cause your insurance rates to go up, and can even prevent you from getting a job. This is because credit scores aren't used solely for the purpose of granting credit. Insurance companies use them against you when issuing an insurance policy, and many employers use them to see how "responsible" you are.

If you think that your credit score is determined by human beings, you would be incorrect. Credit scores are determined by a mathematical algorithm that is a closely guarded secret. There is nobody sitting in a room someplace, reviewing your credit history and then assigning you a number. Instead, your information is fed into a computer that simply spits out a number. This is the first problem all credit scores.

Because 79% of credit reports contain errors, the data used to determine your credit score is likely incorrect. But this is only the first problem.

An even larger issue is that any mathematical algorithm can eventually be manipulated. That's just what happened in the case of FICO scores. For years, people have been able to increase their credit score by becoming the authorized used on someone else's credit card, as long that the person holding that card pays their bills on time and has a good credit score themselves. While you may think that this is a bad thing, it's not when it is used properly. For instance, if you have a child who you want to help establish good credit, you can simply place that child on some of your existing credit cards. This will give your child a much better chance of being able to open up credit in their own name.

Unfortunately, FICO would allow up to 100 people to be placed on a single credit account. Since nobody has 100 children, this ability to increase your credit score started to get abused. Companies sprang up that would charge people with bad credit thousands of dollars to be placed on the accounts of people with good credit.

A simple fix to this problem would have been to limit the number of people that could be added to any individual credit account to three or four. But Fair Isaac came up with a different solution. FICO 08 will eliminate the ability of parents, or anyone, to help a trusted family member out. No longer will authorized user accounts be used to determine a credit score.

On the bright side, FICO 08 may help some people that have an occasional late payment. The score will be more forgiving to those who pay the majority of their bills on time. But those who are chronically late in paying their bills will find that the new score is even harder on them than the original FICO.

by Jim Malmberg

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