Two new scores that could affect you

June 30, 10:34 PMSF Personal Finance ExaminerBarbara Bryn Klare

Previous Next

Comment Print Email RSS Subscribe

Subscribe

Get alerts when there is a new article from the SF Personal Finance Examiner. Read Examiner.com's terms of use.

Email Address   Include other special offers from Examiner.com Terms of Use

FICO 08

The first score, FICO 08, is not new -  it was introduced earlier this year - but its effect on your credit score is just starting to be felt. How you can get a better score, or keep your score high under the new system?

Here are some of the best ways to raise your FICO 08 score:

* Watch multiple late payments
* Don't use all your available credit
The new scoring system penalizes borrowers who use a high percentage of their available credit much more.
* Pay down delinquent accounts right away
Your score could drop more under FICO 08 if you have multiple delinquent accounts.
* Hold a variety of credit accounts
Consumers who have a mix of revolving credit (like credit cards) and installment accounts (like car loans) will be rewarded more points under FICO 08.

On the plus side
* Don't worry so much about shopping around for good credit
Under FICO 08, a moderate number of credit inquiries, which often indicates that someone is shopping around for a good rate on a loan or credit card, won’t hurt your score.
* Don't sweat the small stuff
FICO 08 is more forgiving of small credit oversights under $100. So that means, one missed bill or a forgotten library fine won't leave a negative mark on your credit history.

Read more here about FICO 08.

The Human Capital Score (HCS)
The second score you should know about is very new - in fact, it's still in public beta - but the company that created it will be launching their site in fall 2009. It's the Human Capital ScoreTM (or HCS) and it was devised by People Capital primarily as a metric to help investors who want to lend in the P2P college loan space. Essentially, it takes input such as test scores, GPA (high school or undergrad), choice of major and college and reports back 2-year and 8-year projected mean incomes. The HCS is very different than the FICO 08, because a FICO score is based on actual payment history and the quantifiable details of a person's particular credit history. The HCS is not based on a student's payment history or length of history, since most students have no real history - but instead is based on academic history, achievements and choices.

Today, there is a "loan gap" between federal grants and loans and the real cost of an education somewhere to the tune of $113 billion, some say - which means in addition to private student loans, more students are using or abusing credit cards, and families are tapping home equity lines to fill the gap. Never more than now has education been viewed as an investment - or indeed, an asset class in a portfolio.

What can the HCS tell you? It can help you decide, as an investor, whether a particular student loan is a reasonable risk and therefore, a good investment for you. It can also tell you as a parent if your child's educational choices are trending toward a good future income or not. It could also determine what quality of student loan your child will be able to get.

What can't it tell you? It cannot, of course, predict a student's actual future income or the career path an individual will take. It cannot tell you if a particular student is a hard worker, responsible, good with people, or the next Internet success (remember, Bill Gates never graduated). It only predicts the likely future ability to re-pay a loan - but not the willingness. Does the HCS skew toward "good" colleges like Ivy League schools, and conventional majors like Engineering? You bet it does. Will it discriminate against minorities or students for whom English is a second language? It could, just as standardized test scores can (and the HCS uses test scores as input). Will it discourage students from majoring in liberal arts so they can get a good loan? Possibly. The long-term effects of a score like this on academic choices is not clear, but it is definitely a concern. Just as "No Child Left Behind" mandated teaching methods to favor test scores above learning and squelched creativity in the classroom, this score could change how education is viewed and funded forever. This is a very slippery slope.

A good education should broaden your horizons for the rest of your life - and provide a good paycheck along the way. But it's really up to each student to grow into a financially responsible adult, and there is no score that can determine if that will truly happen.

Students who want to raise their FICO 08 scores, go here.

Barbara Bryn Klare is a finance writer and communications consultant at CafeFAQ Communications, an online information management firm. Check out her blog, The UpSide of Money, for an UpBeat approach to your finances.