By Ken Stoll

This fall, the FICO credit-scoring system will undergo big changes, which the Fair Isaac Corp., the company that creates the secret formula used to calculate the score is downplaying by saying it won't have much of an effect.

I disagree. The way I see it, this could have a huge impact on millions of consumers.

There are two FICO changes that Entrust America is aware of and this is how they might affect you and your family members.

                          

Let’s start by pointing out that of America’s top 50 financial institutions, eighty percent use FICO scores to approve a loan and determine the rate to charge consumers. Retailers, landlords, insurance companies and utilities also use FICO scores to decide what to charge you and may even decline your request for service. Employers might not hire you based on your secret FICO score.

Fair Isaac does not want rivals to copy its secret formula, so it is keeping quiet about exact changes, but a FICO spokesman did say this:

“Fair Isaac divides the population into 10 segments based on credit history and applies a different formula to each. Eight segments are for people with good credit, and two are for people with serious problems."

"Under the new system, the population will be divided into 12 segments: eight for people with good credit and four for people with bad credit. That could result in a slight change up or down in many scores.”

This basically increases the pool for ‘bad credit people’ from 20% of the entire FICO system to 33.3% which is a 2/3 increase. FICO is creating more room in the secret reporting system for folks with ‘bad or incomplete credit profiles’

Now, if your credit is above average, this won’t affect you. But if your credit score is not as good as it should be or you are young and trying to establish your credit, it could mean trouble.

Even a small drop in your FICO score can have a negative impact on your personal finances. It could be the deciding factor if a landlord chooses to rent you an apartment. Your bank might increase the interest rate on your mortgage or loan based on your ‘new’ score.

To illustrate the affect of even a small drop in your score, you simply need to look at Fair Isaac's own web site. According to FICO themselves, there is a $163 difference in the monthly payment on a 30-year mortgage between a score of 620 to 659 and one that is in the marginally higher range of 660 to 699.

A spokesman for Fair Isaac agrees that certain groups will feel the effect far more than others. People with thin credit history or poor credit will likely be affected most, through no fault of their own.

60 Million Americans May Be Affected

Another notable change to the FICO system will be to stop giving positive scoring points to people who are authorized users on someone else's credit card.  Industry experts say this will affect about 30 percent of those with credit reports, which is a whopping 60 million people.

Because FICO will disallow this common practice, it will eliminate millions of authorized users. Their scores will go down, maybe substantially.

This will likely hurt many young people and students, who attach themselves to their parents' credit cards, so they can start to build their own solid credit history. Also, many spouses who are generally women and who are authorized users on the family credit card and those folks trying to re-establish credit by coat-tailing a family member's good credit history may see their scores plummet. 

                  

A way around this new road block is for those ‘authorized users’ to switch to a joint account. That should enable the joint member to continue to enjoy the benefits of the primary cardholders' solid credit history. On the downside, this poses higher risks to the primary cardholder.

Under the old system, if an authorized user abuses the card, the primary cardholder just has to make one call to cancel the users' card.  However, it's not so easy to remove a joint user. The primary cardholder would have to go through the process of closing the account and opening a new one which does not include the other user.

Because it’s a Secret – No One Really Knows the Impact

With a secret scoring system, no one knows for sure exactly what the impact will be. However, this loophole is being closed because according to a FICO spokesman, the lending industry has complained.

You can bet that the financial services industry wants more scores to drop than rise with these changes.

Again, I stress that nowadays it is extremely important to know your score and always take steps to improve and protect it.