The Fair Isaac Corporation, which develops the most widely used formula for preparing a credit score, unveiled a new scoring system this week. It's called FICO 08 because it was supposed to roll out last year.
" FICO 08 will do a better job of distinguishing people who have stumbled once or twice with their credit repayment from people who have a real habit, a real paper trail of late payment with creditors," said Craig Watts with the Fair Isaac.
Here are the key points you need to know about the new scoring system.
Don't max out on credit cards
It will hurt you more than before. In fact, you don't want to get close to your credit limit. Some experts say it's best to keep you balance at 30 percent or less of your total credit limit. I know this may sound weird, but it's just the way things are right now.
"When we look at the people who have the very best credit scores, we identify that they only have two or three credit cards at the very most and they use these cards on a regular basis and they pay off the balances in full every month," said Christopher Lombardo with Clearpoint Financial Solutions in Seattle.
Little mistakes won't hurt as much
With the new scoring system your total credit history counts more than one or two late payments. That's a big change. In the past, a single late payment could clobber your score. Now that won't matter as much if everything else in your file looks good.
Small debt collections hurt less
"A small debit collection under $100 will be ignored completely by FICO 08 which is not the case today," Watts said.
Under the previous scoring system if you didn't pay a parking ticket or library fine and it was sent to collection, that was a red mark in your file.
Keep in mind this is not an excuse to avoid paying bills because a pattern of bills going to collection will ding you.
Piggybacking is back
What's Piggybacking? It's a way to improve your credit score by becoming an an "authorized user" on someone else's account with better credit. This option only available for spouses and children. Others can be "authorized users" but they won't get the benefit of the higher credit score. This was done to prevent fraud.
TransUnion is the first of the big three credit reporting agencies to use FICO 08. The new formula will not change the range of FICO scores, which will still be 300 to 850.
The bottom line: Despite all these changes, the basic rules for having a good credit score remains the same. Pay your bills on time, keep your credit card balances as low as possible. Under FICO 08, these factor are more important than ever.