FICO^® 08: The new FICO score

See how your credit will be rated with the new FICO 08 credit score.

Your FICO^® score helps paint a financial picture of your creditworthiness for banks and other lenders. It's one of the formulas used by two of the major national credit reporting agencies (TransUnion and Equifax), and it could be a determining factor as to whether or not you qualify for a loan or credit card. And if you do qualify, it will also impact the interest rate your lender can offer you.

The Fair Isaac Corporation, creator of the FICO score, has now changed the formula for calculating your credit score. It's called FICO 08.

Why the Need for a New FICO Score?
Improved, more accurate scores mean better-informed lenders making better decisions on who receives loans. Although the exact formula has not been made public, FICO 08 is designed to be a better predictor of defaulters, more forgiving of people who have slipped up just once, and harder on repeat offenders. The range for the new credit scores will stay the same: 300 to 850.

Good News for Better Credit
FICO 08 has some benefits to help qualified people improve their credit scores. These benefits are more "forgiving" to certain types of credit activities, including:

Small debt forgiveness. In the old formula, unpaid debts under $100, like parking tickets, library fines, or small medical bills, would negatively affect your credit score. FICO 08 removes this type of debt from impacting your score.

Home repossession forgiveness. If you've had your home repossessed, or have had a charge off made on a loan balance you owed (meaning that the account was delinquent for so long that the lender considered it a loss), FICO 08 lessens the negative effect to your credit. This part of the new formula is dependent on the fact that all of your other accounts remain in good standing.

One-time late payment forgiveness. FICO 08 recognizes the difference between a "one-time" offender and someone who repeatedly misses payments. If you have a good on-time payment track record, you won't be penalized as heavily for a single late payment.

Better "starter" scores. To open up more credit opportunities, FICO 08 will more closely analyze the profiles of new borrowers and those just starting out with a few credit accounts. This is designed to make more credit available to people who have trouble building a credit score because of their limited history.

Stricter Guidelines for Bad Debt
FICO 08 is also designed to lower the credit scores of borrowers who have certain profiles, while protecting lenders against making bad loans:

High debt-to-income ratio (DTI). Basically, your DTI is the amount of money you earn compared to the amount of debt you carry. This balance of income vs. debt is a good indicator to lenders of your ability to repay your loans. If you carry a lot of debt compared to what you bring in each month, the new formula will significantly lower your credit score.

Eliminating "piggybacking." Piggybacking is a method of improving the credit score of your children or spouse by adding them onto your accounts and letting them benefit from your higher score. However, there are many "credit repair" websites that abuse the system by arranging for people with poor credit to become authorized users on accounts of strangers with better credit. FICO 08 is set up to eliminate the abuse of this practice.

More bad credit files. FICO 08 determines credit scores by separating all credit files into 12 different categories. The new formula introduces two new "bad credit" categories that will negatively affect millions of credit profiles. The Fair Isaac Corporation hasn't announced when the new scores will be available to consumers, so ask your lender if they are using this and how it may affect you.

Your FICO score is one of the most important factors in determining your credit profile. For the most part, the new FICO 08 rating guidelines are a benefit to those who use their credit responsibly and pay down loan balances by making their payments on time. If you're carrying a large balance, and want to find out more about what you can do to improve your credit rating, read Taking control of your credit score. By understanding how certain credit events can affect your credit score, you can begin building a stronger financial future.