Welcome to WCS Money Tutorials. Today's topic is the new FICO credit scores.
How much interest you pay depends on your credit score.
Lenders use credit scores to qualify loan applicants and to determine what interest
rate to charge. Your credit profile will be the main determinant of your credit score,
but it will also depend on the credit algorithm being used to calculate the score.
Credit scoring algorithms change over time.
Although all credit scores use similar components, especially payment history and credit utilization
since they are the best indicators of credit risk, the algorithms that calculate credit scores depend
on the model used and these models change every few years. Usually, either the weight of already
used indicators is changed or new indicators are used. FICO develops new credit scores every few
years using additional information that it gains from credit files over the years. Your FICO credit
score is determined by the 5 factors shown in this pie chart. The percentages are the weights
given to each component proportional to their relative importance in determining your score.
Note, however, that these percentages are only relative and approximate. The true weightings
of each component will vary according to your credit profile and credit history. For instance,
the length of credit history will be much more important with a short credit profile compared to
a credit profile with years or decades of credit history. The above factors are used in all credit
scores because they are the best indicators of credit risk. FICO develops new credit scores
every few years using additional information it gains from credit files over the years.
FICO places different people into different groups known as scorecards, which group people according
to their risk or creditworthiness. This is done so that the same behavior can be treated differently
or scored differently according to the scorecard that the consumer is in.
Thus, opening up several lines of credit within a short time would be seen as a much higher risk
for someone in a low scorecard compared to someone in the highest scorecard. FICO Score 8 is the most
common score used among all lenders, as of 2021. It places greater weight on the credit utilization
ratio, which is the amount of credit used compared to the total amount of credit available.
The credit utilization ratio is calculated both for the total amount of debt
compared to the total amount of credit available and for each credit card. So having a high balance
on 1 card will lower your credit score, even if you have zero balances on your other cards.
So while transferring your credit card balances to another card with a lower interest rate is
usually a good idea, it may decrease your credit score, especially if you continue to rack up debt
on your other cards. This score also de-emphasizes isolated late payments,
meaning that a single late payment will not lower your score as much as in previous versions
if most payments were on time. At the same time,
consecutive missed payments will lower this credit score more than previous versions.
The score also ignores small-dollar collection accounts,
sometimes called nuisance accounts, where the original balance was less than $100.
A serious credit event, such as a repossession or charge-off will not
lower the score as much as previously if you are still current on your other credit accounts.
Having both revolving and installment accounts is rated more positively.
Having fewer open active accounts is rated more negatively. All versions of the FICO score include
authorized user credit card accounts, meaning that an authorized user can create a credit profile
that can be used to calculate a FICO score. However, FICO Score 8 eliminates the benefit
of so-called tradeline renting, where credit applicants are added as authorized users to
credit cards of strangers who are receiving a fee for adding these people to their cards.
FICO Score 9 has these changes. Paid-off loans from collection agencies or other 3rd parties
will no longer be a negative factor. This should provide a good incentive to pay off your debt.
Unpaid medical debt will not lower the score as much as unpaid non-medical debt.
If the medical debt is paid off, then it will not even be a negative factor.
Rental history reported to the credit bureaus will factor into the FICO Score
9, which will benefit people with a limited credit history.
This is an important note about medical debt. According to Experian, most health care providers
do not report to credit bureaus. Only when the debt is sold to a collection agency will that debt
begin to appear on your credit report. However, even if your medical bills do go into collection,
all 3 credit reporting agencies will give you a 180-day waiting period to resolve any medical
debt, before the account even appears on your credit history. Until then, that medical debt
will not impact your credit score at all, since it will not even be in your credit reports.
Released in 2020, FICO Score 10 was developed to better assess the increasing
use of personal loans to consolidate debt. Unsecured personal loans, increasing debt,
and delinquencies will lower FICO 10 scores more than previous scores.
Credit utilization is also a more important factor under FICO 10 and 10 T.
FICO Score 10 T, also released in 2020, uses trended credit bureau data to calculate the score.
While all credit scores consider your entire credit history, the FICO Score 10 T uses
factors such as credit card balances and payment amounts over the previous 2 years. For instance,
under previous FICO versions and most other credit scores, the credit utilization ratio
was calculated monthly and that value changed your credit score from month to month. Under FICO Score
10 T, the credit utilization ratio is averaged over the previous 2 years, so month-to-month
changes in your credit utilization will not change your score as much as under previous scores,
since the latest monthly ratio will simply replace the first monthly ratio of the period.
Unlike other credit scores, the UltraFICO Score, introduced in the 2nd half of 2020,
is based on information from checking and savings accounts and money market accounts.
The UltraFICO Score is designed for people with limited or no credit profile. Also,
unlike other scores, you must sign up and opt-in, since the score is generated by linking your bank
accounts with a secure portal that will be used to generate your UltraFICO Score.
This linking will generate an instant an instant score, which may be higher than
your FICO score if that score is below 680. This score is based on the age of your bank accounts,
the recency and frequency of transactions on these accounts, evidence that you have
enough cash in your accounts to pay expenses, and a history of positive account balances.
If you already have a FICO score then that score will be recalculated based on the new information,
in addition to the information already in your credit history. However, if you do not
have a credit history, then the UltraFICO Score will be given to lenders who request a score.
UltraFICO incorporates consumer cash flow attributes into this new scoring algorithm.
It has the same range as a regular FICO score: 300 to 850. Experian is the only credit bureau
offering the UltraFICO Score, as of 2021. To qualify for the score, you must not have had
any negative account balances within the last 3 months and an average balance of $400 in a
savings account over that same time period. FICO estimates that 70% of consumers with no or limited
credit history and who have satisfied the above criteria will have increased scores. Besides the
UltraFICO Score, FICO has also developed 2 other scores with Experian and Equifax, specifically for
people without a credit history. You must opt into these scores to take advantage of them. Experian
Boost allows people without a credit history to use their payment history for utilities,
such as gas, water, electricity. Internet. cable, and telecom payments. You grant Experian read-only
permission to connect to your online bank accounts and identify your utility payments.
You decide how many such payments you wish to add to the Experian credit file. Since Experian will
have a history of your payments after connecting to your accounts online, it can recalculate your
FICO score instantly. Experian says that it will only consider positive information,
so late payments will not affect your FICO score. You can discontinue the service at any time.
FICO Score XD. FICO, in conjunction with Equifax and LexisNexis Risk Solutions, developed a score
called the FICO Score XD, which uses utilities, landline, mobile,
and cable payments from the National Consumer Telecom and Utilities Exchange
and on property records and other public data provided by LexisNexis Risk Solutions.
The Lexus data includes proper ownership records, frequency of residential moves, and evictions.
The score ranges from 300 to 850 and is still being tested for reliability. FICO has not decided
whether the score will be freely available. A good steady job is the best way to get new credit.
These alternate credit scores based on other forms of credit information do not provide
much of a boost. According to Experian, which uses the FICO Score 8 model for this program,
scores were boosted by an average of 13 points, which is negligible.
The best way to establish good credit is simply to have a good steady job and pay your bills on
time. Many credit card issuers, such as Capital One, will issue cards to people without a credit
history if they have a steady job. You could also become an authorized user of a relative
or get a secured credit card, which is secured with a savings deposit
at the bank issuing the card and the credit limit is proportional to the savings balance.
FICO has also developed some credit scores specifically for auto lenders
and credit card issuers. FICO auto scores are designed for the auto lending industry,
while the FICO bankcard scores are designed for credit card issuers. Each of the specific industry
scores also comes with various versions that correlate with the basic versions
including FICO 8 and FICO 9, such as the FICO Auto Score 8 and 9, FICO Bankcard Score 8 and 9.
The FICO auto scores place a greater weighting on the payment history for auto loans,
while the FICO bankcard scores place a greater weighting on the payment history for credit cards.
Although the details of credit scoring models are secret, it makes sense to
place greater weight on the payment history for auto loans. Most people experiencing
financial difficulties are more likely to pay their auto loan than their credit card debt
since most auto loans are secured, so the vehicles can be repossessed. Note that an auto lender or
a credit card issuer may not necessarily use the industry-specific cards. Many of them use
FICO Score 8, which, according to FICO, is the most common credit score being used in 2021.
Most of the modern credit scores range from 300 to 850. This also includes the new VantageScores,
which are issued by the credit reporting agencies. However, the FICO industry-specific scores range
from 250 to 900. So if you check your credit card app to look at your FICO score and it
shows the top range of 900, then you know that that score is based on the FICO Bankcard Score.
This image by FICO shows the relative popularity of the different scores for
different types of credit, with larger images depicting greater popularity.
Most credit card issuers as well as many auto lenders use FICO Score 8.
Note that while FICO Score 8 is the most popular score used by credit card issuers,
many also use the industry-specific FICO Bankcard Score 8 or 9. Most home mortgage lenders use older
versions of the FICO score because Fannie Mae and Freddie Mac both require the use of such
scores for loans that the lenders intend to sell to these government agencies. Mortgages
are large loans with long terms, so lenders will get scores from all 3 credit bureaus,
then use the middle score. If they only get 2 credit scores, then they will use the lower score.
The frequency of credit score versions among the credit reporting agencies also differs. These are
the scores that the credit reporting agencies will issue if the lenders do not request a
specific score. As you can see here, these are the scores used by Experian, Equifax, and TransUnion
and you can see these are the most widely used scores. These are the scores used for auto
lending, credit card decision-making, and these are the newly released scores by each agency.
That is the end of this video. Thank you very much for your time. If you liked my video, please
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