If you're just getting to the point where you feel you understand your credit score, well, prepare to start over. FICO 08 is on its way and is already in use by some lenders. How will this new credit scoring system affect you when you apply for a home loan?
FICO 08 differs from traditional credit scoring in three major ways:
1. Crummy little debts that slip through the cracks won't hurt you - Any collections or public records with an original amount less than $100 will be ignored. Maybe. For a collection to be ignored by the system, it must be reported as a 3rd party collection agency account and not the collection department of a credit card company. If the collection shows up as "tradeline," or late payment, then it will still count against your score even if it is less than $100. This is great for those whose feet have been held to the fire over library fines, pesky tiny balances for medical labwork that show up in the mail, like, a year after you had the work done, parking tickets, whatever. Yay!
2. Credit card utilization WILL hurt you - The ratio of your current balances to your current credit card limits will be a very big booger with FICO 08. Consumers who get close to maxing out their limits will find their scores lower with FICO 08. FICO has apparently concluded that those who over-use credit cards are more likely to default on their debt than they used to be, so this will count more heavily against you than it used to. Couple this change with the credit card companies' recent moves to cut or close the credit lines of less profitable or higher-risk customers and you have a trend toward less available credit and increased penalties for using it. Today, when a one point difference in your credit score, for example 679 versus 680, can cost you thousands in surcharges to Fannie Mae or Freddie Mac, the FICO 08 changes could be expensive for many borrowers.
3. No piggybacking allowed - This new version of FICO is supposed to be able to tell if an authorized user is artificially boosting his / her credit score by piggybacking--that is, paying to be added to the credit card of someone with good credit as an authorized user. Legitimate authorized user accounts, for example a husband and wife, will still count on your credit score. Whether FICO 08 throws out legitimate accounts or inadvertently lets in piggybackers remains to be seen. But if you are relying on piggybacking to elevate your score, you can probably expect it to drop with FICO 08.
The best thing you can do in anticipation of this change is to pay down your credit card debt as much as you can, but keep your accounts open if possible. Make your payments on time. Apply for credit only when needed. And check your credit report at least annually to correct mistakes, head off identity theft, and monitor your progess as you improve your score.
