The credit industry has drastically changed over the years. Many would argue that the “good old days” were much simpler than today. Back then, a borrower's chances of getting a loan depended basically on whether he had any debts and whether he could pay cash for them. Unfortunately, the simple system had a lot of loopholes and, as the credit industry evolved, it adapted several models to deal make itself much more resistant and reliable.
Nowadays, measuring scale that determines whether your loan is approved or not is your credit score. A credit score is a simple, three digit number that lenders rely on to calculate the probabilities that you can actually pay off the loan you are trying to take out. The better your score, the better your chances of getting that loan.
The most common formula that creditors use is the FICO score. FICO stands for Fair Isaac Corporation, owners of the proprietary software that the three major credit bureaus are using. Recently, a new version of the software was released, FICO 08. Adoption of the new version is gradual among credit card companies and, as the software gains wide use, consumers will have to begin taking into account how the new software will affect their loan applications.
Craig Watts, public relations director of FICO has explained that, “As consumers' credit habits change, we adjust our scoring formula to more accurately reflect information found credit bureau records”.
The new FICO 08 will still use the 300 to 850 scoring metric of FICO. Unpaid debts and others under $100 will no longer affect your score. Credit setbacks of a one-time nature will have a lower effect on your credit score as long as most of your credit lines continue to be healthy. On the other hand, continuous late payments will have a bigger effect on your credit score. FICO 08 will stop the practice of piggybacking to the strong credit record of a stranger, a common practice of credit repair agencies. It will also be more sensitive to your available credit. So you need to be very careful when your credit company suddenly drops your available credit limit. This will severely affect your score.
Adoption of the FICO 08 system is gradual in the credit industry. As a borrower, you may not always be aware of what FICO system is applicable to you. However, there are a few things you can keep in mind to be sure that your FICO score is good such as staying below your credit card limits, avoiding late payments and overcharges or overdraws and always keeping an eye on your credit reports.