Consumers may not know that what is commonly referred to as a credit score is actually a rating provided by an algorithm developed by one company, known as FICO, which previously stood for the “Fair Isaac Corporation.” Recently, FICO announced that the score had been adopted by over 2,500 banking and financial institutions. Those with bad credit should know that managing their FICO score is the key to getting approved for things like car loans.
In 2009, FICO introduced the “8” scoring system as a better predictor of consumer behavior. The score is known by a few different names, such as Beacon, Classic 08, or FICO Risk Score, depending on the organization doing the credit reporting. In the US, the system is now used in over 90 percent of the top financial services institutions.
While the new scoring didn’t drastically change credit scores, FICO predicted that some scores could shift by about 20 points thanks to the new rules. Many of the changes were an effort to help consumers. For example, an isolated late payment did not hurt scores as much as it previously did, as the new scores take into account prompt payments on consumer’s other credit obligations.
The new system also includes penalties. Excessive use of credit cards, for example, was weighted to hurt credit scores more. With the new system, FICO’s data shows that the “8” score was a 15 percent improvement over the previous system.
Consumers should know that their FICO score determines their ability to be approved for car loans. By managing it, they can put themselves in a better position financially.