Much has been written about the recent change in the FICO scoring system from both mainstream media and personal finance blogosphere.
Using my compelling inside information and incredible subject matter expertise, I can insist that it will not make much of a difference.
What? Huh?
First, a little background. Fair Isaac (FICO) is a publicly traded company (trading under, intelligently, the ticker symbol FICO) that sells credit scores to companies.
Meet the new credit worthiness! Same as the old credit worthiness!
Credit Bureaus (the major three of which are Experian, TransUnion and Equifax) are also publicly traded companies that keep information that they provide to companies. What is their product? They sell information about you provided by some banks to other banks so that other banks can intelligibly determine whether to extend a line of credit to you.
Understand this: they are not government entities. Credit bureaus are publicly traded companies trying to make a profit using you as the product. Companies often use FICO (a product of Fair Isaac, remember) in conjunction with the scores provided by the bureaus themselves and their own internal, proprietary models to either determine your rate or to make decisions on whether they are willing to extend credit.
Get That? FICO is a Product SOLD to Banks and other Institutions
Every few years, Fair Issac comes out with a rehash of their FICO credit scoring model. It is very often a very similar (to older products) tweaking of the variables that determine creditworthiness. For example, in a new model versus an older model, adding an inquiry to your record might cause your FICO to drop 2 points instead of 1.8.To the average consumer, this is 100% meaningless. The core tenets of personal financial discipline remain the same:
- Keep utilization low
- Pay on time
- Don’t charge off
- Don’t revolve
- Pay off all your credit cards
- Don’t carry a balance.
The Obvious Conclusion
That's right: I just wanted to iterate that Fair Isaac themselves have a very obvious incentive to overplay the differences between versions of their models... marketing. Convincing people that the newest model is vastly superior to the old models makes banks want to change the version of the FICO product they purchase and license!
Banks can still purchase an older FICO model for cheaper and the more FICO overplays the changes, the more they are able to sell the product at a heightened price (Brand New! Up to date credit scoring system! Now for only $9.99!).
The takeaway: not much has changed and it still does not mean much (if anything at all) to the end consumer. Think about that the next time you see a blog talking about the huge benefits of the 'new credit scoring model' - it's the same as talking about any other new product, except for the fact that consumers aren't the ones buying it.
They are... in a way... the ones selling it.
Cheers,
Cameron Daniels
