Changes coming to credit scores in 2008

Fair Isaac Corp, the company that created FICO credit scores, is changing its calculations in 2008 (subscription required). The company says that the new scores will be better at predicting the likelihood of defaults on debts. They say the new system will reduce default rates by 5% to 15%.

The new credit scores, called FICO 08, will supposedly be impacted less by rare credit mistakes by consumers. But those who repeatedly make credit blunders will be treated more harshly. The scoring system will still analyze payment histories, available credit, length of credit histories, and the number of inquiries and new accounts.

Delinquencies on accounts will now be analyzed a little differently. In the past, a delinquency was a delinquency. Under the new system, major and minor delinquencies being looked at more carefully and scored accordingly. Consumers with multiple delinquencies will also be treated more harshly than those with only one or two.

Fair Isaac says that 90% of the largest banks use the FICO score in their lending process. The scores are also used by companies offering insurance, utilities, and cellphone service. The new credit scores will be put into play by spring.

Forensic accountant Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations through her company, Sequence Inc. Forensic Accounting. The Association of Certified Fraud Examiners honored Tracy as the 2007 winner of the prestigious Hubbard Award and her first book, Essentials of Corporate Fraud, will be on bookshelves in March 2008.