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Monday, December 24, 2007

FICO Scores and the Credit Card Crunch...

There is a double Whammy coming down the pike to sub-perfect credit card holders out there.
First FICO, Fair Isaac Company's scoring arm, is rolling FICO'08. This is a code update that they due every year or so, but this year's is a pretty big change.

A quick primer first...Your FICO scores are what determines how good of a loan you get, or how low of interest rate. Banks use it as a "fair" way to measure people against each other. FICO scores range from 300-850; but really you need 600+ to have a shot at real non-mob-knee-breaking credit, and 720+ to get the scary perfect deals. There is a ton of great info out there about FICO scores and I suggest that since your finances depend on the score, know it and review often (yearly worst case, I look every month because I am paranoid).

But back to the double Whammy; the FICO'08 code roll changes some key scoring notions of previous models. Basically it doesn't penalize as much for having a bunch of credit files, but nails you harder for having a higher percentage of used credit.

That means some of us Ramsey Debt Snowball believers are going to get hit on our numbers; potentially up to a 25 point swing. This is due to the basic tenant of the snowball; pay one debt off at a time, make minimums on the others until the first one is paid off, apply it along with the second minimum to pay more than the minimum.

It will hit snowball users because many of us have maxed or high debt-to-credit ratios on our non-snowball payments cards. Not to mention some cards have FICO triggers for their Rate changes...so basically because your score changed (and even though it had nothing to do with you) your rate could go up. In some cases...a lot.

The second whammy is that since the banks are getting whacked right now with bad home loans which is leading to bad Credit Card loans, they are tightening up their approval, or at least the reins on who gets the better offer. This means it will be harder to dump those higher rate cards for something more comfortable.

Any silver lining...especially on Christmas Eve?

Yep, some will actually get a score boost if they have generally under a 35% utilization on all of their card and no missed payments. That is huge! Also, we are in an interesting time in regards to FICO. The big three Credit boys, Trans Union, Experian and EquiFax are all trying to bust FICO's monopoly and possibly get there own model that they don't have to pay for. To date, only Experian is beginning to roll FICO'08 because of this.

That being said the end of the year is not a bad time to plan out when you are going to check your credit, also make doubly sure to check prior to any major purchases. This does not mean that you should stop working your debt plan or switch to a new one. It just means there are new rules and you are better off knowing them before you play.

The embarrassment you save could be your own...


Amanda @ Me vs Debt said...

Hi RacerX. Can you provide any links for further reading? Thanks, Amanda

RacerX said...

Sure Amanda!

Three Good articles on FICO 08 (just copy and paste into your browser)




Let me know if your are looking for anything else. Happy Holidays and thanks for reading!

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