FICO 08 Allows "Piggybacking"; Equifax Adopts the New Credit Scoring Model

The FICO credit scoring system, originally implemented in the late 1950s by the Fair Isaac Corporation, has been undergoing a few lifts and tucks lately. The new scoring model, called the FICO 08, was first adopted by credit bureau TransUnion several months ago, and Equifax just announced that it will also begin using FICO 08.

Authorized user accounts on the FICO 08

Originally proposed in June of 2007, FICO’s main intent was to halt the practice of "piggybacking" to improve credit scores. This happens when someone with bad credit "piggybacks" on someone with good credit by becoming an authorized user on one or more of their credit cards. In other words, "piggybacking" allows the positive FICO fairy dust of one consumer to rub off onto another.

However, the Federal Trade Commission deemed Fair Isaac’s move to stop factoring authorized user accounts in calculating credit scores as illegal. Fair Isaac backed down and has since kept authorized user accounts as a factor when calculating credit scores.

In response to this defeat, Fair Isaac decided to make other significant changes to FICO 08, which is why there was such a long delay in its release. Here is how the new guidelines under FICO 08 may affect your credit score, either for the better or worse:

Better:

• You are not penalized as much if you have a large amount of credit that you are not using.
• Unpaid debts less than $100 may not have any effect on your credit score.
• For those who have had their home repossessed or who have had to make a charge-off, your credit score will not be affected as much if your other accounts are in good standing. 
• Your score will not be penalized as much for one-time late payments.

Worse:

• A higher amount of debt compared to your available credit will count more heavily in determining your credit score. You may have received notices lately from your credit card companies saying they have reduced your credit limits. This will negatively affect your score even if you rarely use the cards. 
• If you have reduced the amount of debt you carry or taken on less new debt, your score could be lowered.
• If you consistently make late payments, your score will be more negatively affected. 

One thing that hasn’t changed under FICO 08 is the need to consistently be using credit (smartly, of course) and even carry a small balance to keep your card and credit history active. The system still seems to be encouraging everyone to take on new debt in order to be considered a financially responsible person. If you can control the amount you put on your credit cards and pay them off each month, you’ll end up a winner in the end.