FICO® 8: What is it and why authorized users shouldn’t be worried
FICO® is known for revising its credit scoring criteria every now again, factoring in the ever-evolving credit landscape and varying consumer behaviors to improve its credit score accuracy.
Back in January 2009, FICO® (formerly known as Fair Isaac Corporation) introduced FICO® 8. Authorized users may be aware that some of the changes under the new model can affect them. But the good news is, there isn’t much to be worried about for the vast majority. Only those who are engaging in certain deceptive practices are impacted by these changes, leaving most authorized users indifferent to them.
A brief history on FICO® and what it is
Credit scores are important because they determine everything from whether consumers can turn on utilities to whether they can buy or even rent a home. And FICO® is the most popular of all the credit scoring models out there because it has the best track record and has been around the longest – since 1989.
Put simply, it’s one of several companies that provide software to calculate consumer’s credit scores based on something called predictive analysis, which analyzes consumer data to predict how credit trustworthy they are. Lenders then consider this score to determine a consumer’s credit risk before extending credit to them.
The benefits of being an authorized user
FICO® has always been friendly toward authorized users. And most users, particularly those with poor or mediocre credit, have benefited and can continue to benefit from several advantages under this designation, including:
A boost in credit score: When the primary cardholder makes payments on time, that reflects as a positive mark on both the account owner’s and authorized user’s credit history. FICO® takes payment history into account when determining credit scores, so this can positively influence authorized users. In fact, all the positive marks on the card become one with the authorized user’s credit history and lead to an increased score.
No payment responsibility: One of the greatest perks authorized users have is that they don’t have any obligation to pay the debt on the credit card – that’s the sole responsibility of the account owner.
Access to credit: Users who have poor or no credit might find it difficult to get approved for a decent credit card, but may have access to a better card with more rewards and a higher limit when they’re on the card account of someone who has better credit history. As account owners make regular and timely payments, authorized users can boost their scores and get better card offers in the future.
Benefits to spouses:If one spouse with bad credit is an authorized user on the other spouse’s card, he or she can improve their credit score over time, allowing the pair to get more favorable rates and approvals for big-ticket purchases down the road, such as a car or home.
Although being an authorized is a great thing and comes with many benefits, FICO® 8 has changed up the scoring rules. While these won’t affect the vast majority of authorized users, it can still impact some.
What’s changed with FICO® 8
While the FICO® Score 8’s foundation is parallel to previous versions of this scoring model, there are several unique features that make FICO® Score 8 a more accurate score.
The basic factors for computation haven’t changed under this version. These include payment history, level of debt, length of credit card history, types of accounts and pursuit of new credit.
However, these are the areas impacted:
- Authorized user accounts.
- Credit utilization.
- Collection accounts.
- Late payments.
First, let’s address the impacts to authorized users.
Changes that affect authorized user accounts
When calculating credit scores, all FICO® Score versions take into account authorized users.
Being an authorized user holds many benefits when you piggyback off the credit of a spouse or close family member. But FICO® 8 recognizes that some consumers abuse these benefits by engaging in something called tradeline renting. Tradeline renting is a practice where someone becomes an authorized user on a stranger’s credit card to boost their own score and deceive lenders into believing they’re a lower credit risk than they truly are. This is considered a dishonest practice, and FICO® 8 recognizes and accounts for it in its scoring model by reducing the benefits authorized users get for tradeline renting. This is done to protect honest consumers and also lenders who consumers could be misrepresented to by a falsely higher score.
Unless consumers are engaged in tradeline renting practices, they can continue to reap the benefits of their status and shouldn’t be negatively impacted by the authorized user changes to FICO® 8. In other words, consumers should be safe from impact as long as they are tied as an authorized user to an account that belongs to an immediate family member, such as a spouse, grandparent, parent or sibling.
Here’s a brief description of the other three changes impacted by the FICO® 8 scoring model.
The credit use ratio measures the level of debt relative to the credit limits available to cardholders. All versions of FICO® consider high credit card usage to mean a consumer is a higher risk to lenders, but with FICO® 8, there’s heightened sensitivity to credit cards that are used a lot. For example, a credit card used more closely to its maximum credit limit can affect scores more than they’ve been impacted in the past. That means that a lower card balance can help improve credit scores under the new model.
In FICO® 8, trivial small-dollar collection accounts having an original balance less than $100 are ignored. This can save a lot of hassle for the peskier, smaller balances people may sometimes overlook or forget about until they pop up on a credit report.
FICO® 8 is more forgiving than its previous scoring models. For instance, if a consumer is one month late on a payment, other scoring models might penalize you with loss of points, but FICO® 8 will forgive you if the incident appears to be a one-off occurrence outside the norm of your regular payment history.
However, the reverse is also true. Consumers who are regularly late can see a deeper dip with their FICO® score under the new model.
Remember, even under FICO® 8, the underlying elements that impact all versions of FICO® Score still remain unchanged:
- On-time bill payments.
- Low credit card balances.
- New credit accounts opened only when and as needed.
As long as the account owner is responsible with these components, they’ll be able to maintain their FICO® score and continue to positively impact authorized users’ score in the process, too.