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FICO changes its score

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KAI RYSSDAL: Other than your Social Security number, probably the most important digits attached to you in this economy are the ones that make up your FICO score.

What FICO actually stands for right now doesn’t matter, but the number definitely does. It runs somewhere between 300 and 850. It lets lenders know what kind of a credit risk you are. And more to the point, it helps determine how much interest you pay when you borrow.

A new and supposedly improved formula for setting those scores went into effect today. Marketplace’s John Dimsdale looked into whether the recalibration is a good thing for borrowers.

JOHN DIMSDALE: FICO stands for Fair Isaac Corporation. That’s the leading provider of risk assessment tools to lenders. Spokesman Craig Watts says the new formula is better at identifying who’s a bad credit risk. This revision’s been three years in the making.

CRAIG WATTS: So it, in fact, predates the credit crisis. But we were looking at the same factors that lenders are wrestling with now through the credit crisis — such as how to do a better job of managing risk with borrowers who have a spotty credit record.

The new formula is more forgiving of borrowers who slip up just once with a late payment. And it flags repeat scofflaws. Evan Hendricks, the author of “Credit Scores and Credit Reports,” says borrowers will welcome a more compassionate risk analysis.

EVAN HENDRICKS: It’s heartening to me that their model is going to recognize that the one slip-up is not going to trash you as it did under the old models.

Craig Watts of Fair Isaac says most consumers will notice little change to their credit score.

WATTS: Consumers who want to get a better FICO score should still pay their bills on time and keep credit card balances low. Those rules of the road haven’t changed a bit.

The challenge now is to get banks and other lenders to use the new formula, says Evan Hendricks.

HENDRICKS: We have a whole history of Fair Isaac updating its scoring models, but then the new and improved scoring models not being incorporated by lenders that just don’t want to bother to change.

He says that’s because of bureaucratic inertia and lenders not wanting to pay for the revamped score.

In Washington, I’m John Dimsdale for Marketplace.

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