Your Credit Score: Every Point Counts

by Gerri Detweiler, consumer advocate and author

Over 100 billion served.

While that statement may remind you of the slogan that used to be displayed on McDonald’s Golden Arches, here it doesn’t refer to how many hamburgers have been consumed, but to the number of FICO scores that have been purchased. Created by Fair Isaac Company, FICO scores are the most popular formula used by businesses for credit, insurance and job-related decisions.

But just as McDonald’s still serves up favorites like hamburgers and fries while introducing new menu items to keep up with changing tastes, FICO scores are updated periodically to reflect trends in consumer behavior. The most significant update to FICO credit scores in many years, called "FICO 08," has been recently introduced. As this new FICO formula is adopted, consumers may see their scores change, even though their credit habits remain the same.

If you haven’t noticed a change in your score yet, one reason is because the conversion isn’t automatic. In the same way that you can choose to upgrade software on your computer to the most recent release or stick with an older version, the credit reporting agencies and lenders have the choice of using various versions of FICO scores. While some lenders are already in the process of switching to this new scoring formula, it will take some time before FICO 08 becomes the industry standard.

Some things won’t change: FICO scores still range from 300 – 850, with a higher number indicating a stronger score. While few consumers score a "perfect" 850, those with scores in the high 700’s or above find themselves eligible for the best credit offers. Nationwide, about half of consumers’ scores are above 723, and half below.

Fortunately, many union members’ good credit habits already help them earn strong credit scores, and they will find their numbers improve under FICO 08. Those consumers with weaker scores, however, may find see their scores drop under the new formula.

Here are some ways FICO scores are changing:

A Little Leeway

If you’ve made it a point to pay all your bills on time, you know how frustrating it can be when a single negative mark appears on your credit report and almost seems to wipe out years of on-time payments. For example, a medical bill that you thought was paid by your insurance company could wind up in collections, and be reported as a collection account on your credit report, significantly damaging your credit.

FICO 08 aims to be a little more forgiving of these isolated instances as long as your credit before and after shows a strong history of on time payments. If you resolve that collection account and continue to pay your bills on time, for example, your credit score will recover. That doesn’t mean you should be any less vigilant about paying your bills on time, though. In the short term, a serious delinquency can cause your credit score to drop drastically.

Inquiries into your credit file are another score factor that are treated with more leniency under the new model. As you may know, when you apply for credit, an "inquiry" is listed on your credit report indicated your credit report was reviewed. Numerous inquiries in a short period of time can hurt your credit, though some types of inquiries (such as those for pre-approved credit offers or when you check your own credit report) don’t affect your score. Inquiries created when you shop for credit won’t hurt your score as much under the new FICO 08 model.

The right mix

When it comes to your credit score, it "pays" to use credit. The highest scores go to consumers with established records of using credit and paying their accounts on time. "Avoid credit and your credit score can be as bad as someone who has been through bankruptcy," warns John Ulzheimer, a former executive of both Fair Isaac and Equifax, and author of You’re Nothing But a Number. That may be even truer under FICO 08, which awards higher scores to consumers who have demonstrated strong payment records on different types of credit accounts, such as credit cards, student loans, vehicle loans and a mortgage.

That doesn’t mean you have to carry a lot of debt – or pay hefty interest charges – to build strong credit. Pay your credit cards in full each month if you choose. Just don’t put all of them away in a drawer; use them at least once every month or two so they remain open and active. Keep in mind the balance shown on your credit report is simply the amount outstanding on your account at the time your account was reported to the credit agencies. It’s not necessarily the amount you carry over from month to month on your card. That means you can pay your balance off in full and still score well on this factor.

Do watch your balances, though. With FICO 08, maxing out your credit cards can harm your credit score even more than before. Even if you make all your monthly payments on time, high balances on your revolving accounts such as credit cards, hurts your score. Try to keep balances well below your credit limits.

No More Free Ride

One of the biggest changes under the new FICO formula is the fact that the new model will ignore accounts listed as "authorized users" when calculating credit scores. An authorized user is someone who is added to a credit card account so he or she can use the account. Unlike a cosigner or joint accountholder, however, authorized users are not legally responsible for the bills.

This change came about because unscrupulous credit repair firms were acting as brokers to "rent" authorized user slots on cards held by consumers with good credit histories to perfect strangers with poor credit, for the purpose of quickly boosting their credit scores. But for the millions of Americans who are listed as authorized users on a spouse or family member’s credit card, they may be surprised to see their credit scores drop when they no longer get "credit" for those accounts.

Check your reports

The credit data collected by the three major credit reporting agencies: Equifax, Experian, and Trans Union, provide the ingredients used to cook up credit scores. If the information reported to one or more of the major credit agencies is wrong, the credit score that is created may not accurately reflect your creditworthiness. You can check your credit report free once a year at AnnualCreditReport.com or by calling 1-877-322-8228.

Union members get a 15% union discount through myFICO®, on credit scores, credit reports, ID fraud or identity theft protection and personalized score explanation.

For more tips, visit myFICO education.

Navigating the Changes In Your Credit Score

Following are three scenarios provided by Fair Isaac to help you understand the changes in credit scores. Each example shows how a consumer's credit score may increase or decrease under FICO 08.

Scenario #1: Higher-risk credit

Jose and Alicia
Current FICO® scores: 625

New FICO 08 scores
↑ Alicia: 650
↓ Jose: 600

Each of their credit reports show:

• √ About 10 accounts (open or closed).

• √ Oldest account about 10 years old.

• √ One major account delinquency (such as a charge-off or repossession).

• √ No public record (such as a tax lien or bankruptcy).

What helps Alicia's score under FICO 08?

• + Higher number of open accounts reported as paid on time.

• + Strong mixture of revolving (credit cards) and installment (auto loan, student loan, etc.) accounts.

What hurts Jose's score?

• – More closed accounts and fewer open accounts reported as paid-as-agreed.

• – No open or active installment loan account on file.

Alicia scores more points for having credit accounts in good standing and for showing an ability to handle a variety of credit types. Jose's score is lower because his credit demonstrates less recent experience in managing credit responsibly.

Scenario #2: Newer credit

Bill and Jennifer
Current FICO® scores: 665

New FICO 08 scores
↑ Bill: 685
↓ Jennifer: 645

Each of their credit reports show:

• √ First established credit accounts less than three years ago.

• √ Five accounts listed.

• √ No serious credit delinquency (90 days or more past due).

What helps Bill's score under FICO 08?

• + Larger number of open accounts that have been paid as agreed.

• + None of his reported accounts has a high balance relative to the credit limit.

What hurts Jennifer's score?

• – Same number of accounts, but fewer open and active accounts.

• – At least one revolving account has a high balance relative to the credit limit.

Although Bill doesn't have a lot of credit experience, he is managing a variety of accounts well. There is less evidence that Jennifer is handling her credit well. The fact that she is closer to her limit on a revolving credit account (most likely a credit card) doesn't help, since that factor carries even more weight than it did in the older version of the FICO scoring method.

Scenario #3: Credit-seekers

Isabel and Fred
Current FICO® scores: 725

New FICO 08 scores
↑ Isabel: 745
↓ Fred: 705

Each of their credit reports show:

• √ Oldest accounts on their respective credit reports is about 10 years old.

• √ Between 15 and 20 accounts.

• √ At least two new credit accounts opened within the past year.

• √ No serious credit delinquency (90 days or more past due).

What helps Isabel's score under FICO 08?

• + Lower balances, and using less of her available credit.

• + More credit card accounts on her credit report that show a balance.

• + An open auto loan account that has mostly been paid off.

What hurts Fred's score?

• – More credit card accounts with higher balances relative to the credit limits.

• – His auto loan has not been paid down much from the original loan amount.

Isabel received more points for demonstrating a good ability to handle a variety of credit types. While a greater number of accounts with balances would seem to be more risky for lenders, in Isabel's case, the fact that she has a greater number of accounts with balances — but she keeps those balances low — shows that she is actively using her credit and handling it responsibly.

Fred also has a variety of credit types on his report, which helps his score, but he hasn't yet demonstrated the ability to handle installment loans over time, which hurts his score.