How FICO scores are changing: 3 scenarios

By MSN Money staff

Fair Isaac created the following scenarios to help consumers understand how FICO 08 works:

Scenario 1: Higher-risk consumers

Consider Jose and Alicia, who have similar credit histories:

• Each has about 10 accounts (open or closed) on his/her credit report.
• Each has been managing credit for about 10 years, based on the age of the oldest reported accounts.
• Each has at least one major account delinquency on his/her credit report (such as a charge-off or repossession).
• Neither has a public record on his/her credit report (such as a tax lien or bankruptcy).
• Each has a FICO credit score of about 625.

When a lender checks their FICO 08 scores, however, Alicia's is 650, whereas Jose's is 600.

Alicia's score is higher because:

• Compared with Jose's, Alicia's credit report shows more open accounts that are reported as "paid as agreed." So she received additional points for having credit accounts in good standing.
• Her credit report demonstrates she has had a mixture of revolving accounts (credit cards) and installment loans (such as auto loans and student loans). So she received extra points for demonstrating a good ability to handle a variety of credit types.

Jose's score is lower because:

• Compared with Alicia's, Jose's credit report shows more closed accounts and fewer open accounts that are reported as paid as agreed. That means he has comparatively less recent experience in managing credit responsibly.
• His credit report also has no open or active installment loan account on file. So he hasn't demonstrated that he has successfully managed a variety of credit types.

Scenario 2: Thin-file consumers

Now consider Bill and Jennifer, who have similar credit histories:

• They established their first credit accounts less than three years ago.
• Each now has five accounts listed on his/her credit report.
• Neither credit report shows a serious credit delinquency (90 days or more past due).
• Each has a current FICO credit score of about 665.

When a lender checks their FICO 08 scores, Bill's is 685, whereas Jennifer's is 645.

Bill's score is higher because:

• His credit report shows that he has a relatively 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.

Jennifer's score is lower because:

• Compared with Bill's, her credit report shows she has relatively few active, open accounts. This means there is less evidence in her file that she is handling her credit well.
• She has at least one revolving account with a high balance relative to the credit limit. This is significant because higher credit utilization can have greater weight as a risk factor in the calculation of FICO 08 scores.

Scenario 3: Mainstream consumers

Finally, consider Isabel and Fred, who have similar credit histories:

• The oldest account on their respective credit reports is about 10 years old.
• Their credit reports each contain 15 to 20 accounts.
• Neither credit report shows a serious credit delinquency (90 days or more past due).
• Each has a current FICO credit score of about 725.

When a lender checks their FICO 08 scores, Isabel's is 745, and Fred's is 705.

Isabel's score is higher because:

• Compared with Fred's, Isabel has lower balances and is using comparatively less of her available credit. She also has more credit card accounts on her credit report that show a balance. Combined, these two factors demonstrate she is actively using her credit and handling it responsibly.
• Her credit report also contains an open auto loan account that has mostly been paid off. So she received more points for demonstrating a good ability to handle a variety of credit types.

Fred's score is lower because:

• Compared with Isabel's, Fred's report shows more credit card accounts with higher balances. Because having high utilization correlates to statistically greater credit risk, it lowers his score.
• While he has an open auto loan on his credit report, very little has been paid down from the original loan amount. So although Fred's score benefits from the variety of credit types on his report, he hasn't yet demonstrated the ability to handle installment loans over time, and this is reflected in his receiving fewer points than Isabel.

Published Dec. 29, 2008