What’s Changing with FICO Scores

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Any active consumer knows the impact their FICO score can have on the interest rates they have to pay when borrowing money. Even those who have stellar credit histories are experiencing declines in their FICO scores due to a decrease in the total amount of available credit being offered by lenders.

One of the biggest components in determining your credit score is something called a “credit utilization ratio.”  In the FICO mathematical equation the amount of available credit in relation to the actual amount being used heavily weights the ultimate rank you earn. Ultimately the equation wants the consumer to have a high amount of credit with only a small fraction being used at any one time.

That was all fine and dandy when credit card issuers were happy to open up the lines of credit for those who deserved and until recently it was not uncommon for credit cards to provide their customers with tens of thousands of dollars in credit. However, in a move to mitigate their chances of loss, banks are reducing the amount of available credit that was already previously issued to consumers. That decrease in available credit in relation to debt being carried is negatively impacting the FICO score of many thus pointing out the overall fault in the scoring system.

Unfortunately, the FICO system, (created by the Fair Isaac Corporation) is the most common factor when determining the amount of money and individual will be charged when taking a loan of any type. Statistics indicated that arbitrarily, a minimum of 30 million Americans had their credit limits reduced in the second half of 2008. As the economy has yet to rebound, that trend is expected to continue.

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