Did you hear? Charging is Changing

During the next few weeks, borrowers will start to see the effects of some significant changes in the credit industry.  For people that are caught up in the mortgage mess and the real estate slow down, these changes may not seem important.  For at least 60 million people, however, these changes will definitely have an impact on what they are carrying in their wallets.

 1.   FICO '08 IS ALMOST HERE

   The newest version of the Fair Isaac Corporation credit scoring formula will not include authorized user accounts.  As a direct result of abuse from credit repair companies, the formula has been changed to negate the advantage of being listed as an authorized user.  Many consumers have used this option to build and/or repair their credit.  As the practice of "piggybacking" has gained popularity, however, Fair Isaac has developed a formula that would not factor those accounts into the overall score.  Estimates are that 60-75 million people will be affected and, in most cases, the effect will be negative.  Many of those people will be women that have been listed as authorized users on their spouse's credit cards.  If "authorized users" do not receive points in the new scoring formula, overall scores will go down.  Consumers that have paid a fee to have their names added to someone's card to boost their credit and consumers that have rented their accounts could be guilty of fraud.   The change in the credit score formula, in no way, changes the status of the account or the people listed on it.  Although the new scoring formula will be available from Fair Isaac by early 2008, complete implementation of the new formula by credit bureaus and lenders is not likely to be immediate. 2.  VANTAGE SCORE CHANGES THE EQUATION One of the reasons that credit bureaus and lenders will be slower to buy in to FICO '08 is the introduction of a new formula for computing credit scores.  VantageScore was introduced in 2006 as more predictable, consistent credit score and one that provides better information for consumers with little or no credit history.  According to Kerry Williams of Experian, "VantageScore's innovative scoring technology helps lenders more accurately assess risk, specifically in the subprime consumer segment."  It should also be noted that VantageScore was created and is owned (jointly) by Equifax, Experian and Transunion, the 3 major credit bureaus. So far, FICO is still the most recognizable formula in the credit business but, if VantageScore becomes more widely accepted and used, it would save the credit bureaus a LOT of money.  Using the scoring formula they own versus paying for the Fair Isaac formula would certainly be helpful to their bottom lines.  Basically, VantageScore uses the same information to calculate their score that Fair Isaac uses.  Other than that, there are some major differences in the formulas.  The most obvious difference is the score itself.  The VantageScores range from 501-990 and they are laid out something like a grading scale.  FICO scores range from 300-850.  Obviously, it is difficult to compare "apples to apples" with the 2 scores because the ranges are so different.  It remains to be seen how well VantageScore will perform and whether or not there will be a major shift away from FICO.  Suffice it to say, however, that its presence changes the credit score equation dramatically. 3.  FREEZE YOUR INFORMATION FOR SAFEKEEPING As of October, all 3 of the major credit bureaus have announced plans to allow consumers the option of placing "security freezes" on their credit reports.  Equifax, Experian and Transunion will make this option available to all consumers, regardless of whether or not they live in a state that has already adopted "security freeze" laws.  This option will be available free of charge for all victims of identity theft.  All other requests for security freezes will carry a fee.  Fees will vary for the 3 bureaus and they will take into consideration the fees for states that have already adopted laws for this practice.    A security freeze locks a credit file and prevents access to it without the consumer's consent.  With the option of placing a security freeze will come a variety of options (and fees) for suspending the freeze and allowing temporary access when the consumer needs credit approval.  A security freeze is not the same as a security fraud alert.  A fraud alert acts as a "flag" to potential lenders to let them know that this person suspects that their identity has been stolen.  A fraud alert has a definite time period associated with it (90 day or 7 years) while a freeze can be "turned off and on" at the discretion of the consumer.