FICO tweaks its secret credit-rating formulas every so often and now they have another one coming up in September. Many of us think that FICO only helps out in the residential real estate business, mortgages that is, but their score carries a lot of weight in other areas, too. Banks offering car loans rely on it, landlords and credit card companies pull one to look at, employers generally check it before making hiring decisions and insurance firms assess risk based on it. It has become a key indicator on someone's financial background.
The changes that the company will introduce later this year involve the algorithms and databases they now use. The result will be a more accurate credit score that'll give anyone studying it more confidence in deciding what level risk he's faced with. FICO is vague about what exactly will be tweaked and how because it's carefully protecting its intellectual property. Pretty much like what Google is doing with its search engine rankings.
They do say that the main beneficiaries will be subprime borrowers and those who have so called thin files, which means that they lack an acceptable credit history for a variety of reasons.
For the subprime applicant they'll add another category that is labeled bankruptcy and everyone who has declared one goes in there. Presently they're in a group where they're judged side by side with those who have never missed a payment and that's too severe. Unfair, you might say.
The thin file segment consists of young people just starting out, new immigrants with little experience in our credit system and others. This change here also makes a lot of sense. Someone's thin credit file doesn't necessarily mean he isn't creditworthy. The new metrics that are likely to be incorporated into the score from now on are rental history, utility bills and any type of payment history that shows a pattern, like rent to own.