Bankruptcy & Foreclosures

I know, I know, we hear it all the time: Pay your bills on time and you will be rewarded with a high credit score, slip up and your score drops. One of the most common questions around here is “how exactly is my score computed?” or better yet “how long does a mistake remain on my report?”

I have some good news and, well, some more good news. Fair Isaac & Company (FICO), the group responsible for the current credit score model, is just about set to release a new formula of computation! Better yet, the new formula plans to further benefit those who pay their bills on time.

Since 2006, FICO has been assembling their new credit rating system and may still take a few months before consumers see changes in their credit score (as the bureaus themselves (Experian and TransUnion) adapt to the new rating formula. Interestingly, the new model began development long before the current recession flared up.

So what’s the point of the model makeover you ask? Surprisingly, the core of the new design was intended to alleviate the exact economic situation we’re currently going through! The idea behind it is to provide a better differential between good risk borrowers and bad risk ones by giving creditors a more accurate prediction of the potential for default. What’s this mean to you? If you happen to be a consumer in fair standing with a pretty solid track record for making your payments, your score could very easily jump by as much as 25 points under the new formula.

Let’s take a look at some of the individual areas the new formula plans to improve:

The system treats a single large slip up (even as much as 90 days) as an “isolated delinquency” to individuals with a 10-year credit history. Routine late payments of less than 90 days will still damage your report but at least now a legitimate mistake won’t haunt you so severely.

Also under the new system, multiple credit inquiries in a short period of time won’t be so damaging to your credit score, as now they will be weighted less heavily in calculating the overall number.

Finally, the new system actually rewards borrowers who demonstrate the ability to stay on top of both revolving debt (credit cards, lines of credit) and installment loans (auto loans, mortgages). Believe it or not even if you show a hodgepodge of loans but a solid history of paying them on time, expect your score to jump up as well.