Ask John: What consumers might benefit from the FICO credit score change?

If you have a Capital One credit card then you’ll want to read this article

Unless you’ve been hiding under a rock for the past four weeks you are probably aware of the significant change to the FICO scoring system. Fair Isaac has decided to eliminate any value that you were receiving from credit cards where you are listed as an ‘authorized user.’  As many as 75 million Americans will be affected by the change, and most of them will see their scores go down.

This change is bad news for pretty much anyone who is listed as an authorized user on a credit card account. Any benefit you were getting for a low balance, sterling payment history or a well-aged account will cease immediately since the newer versions of the FICO score will completely ignore any account where you are listed as an authorized user. The results for many will be higher interest rates, lower credit limits, and even credit declines. Nobody is debating that this will hurt millions of consumers who have done nothing wrong.

In a strange twist of fate this change by FICO may actually serve to protect people who are being abused by Capital One. You know Capital One. They’re the guys who spend all of that money on the “What’s in your wallet?” advertising. They also sponsor a bunch of the second tier college bowl games on ESPN. Unfortunately for millions of unknowing cardholders, they’re also the ones who are keeping their credit scores low.

Tell me more!!

Capital One chooses to report your high balance to the credit reporting agencies rather than your credit limits. And on the surface while this doesn’t seem like a big deal, once you start peeling back the onion you’ll learn why so many consumer advocates despise this practice. There is a measurement that’s important in every credit-scoring model called ‘revolving utilization’ and it’s the percentage of your credit limit that you are using in the form of a balance. So, if you have a credit card with a $10,000 credit limit and a $5,000 balance then you are 50% utilized. The higher that percentage, the lower your credit scores…it’s that simple.

Capital One’s decision to report your high balance rather than your credit limit leads to credit scoring models thinking your account is more highly utilized than it really is. Say, for example, that the highest amount I ever charged in a month was $5,800. Then in the example above you would appear to be 86% utilized rather than 50%. This is happening to millions of customers right now.

So how is this FICO change going to help me?

This is completely unintentional, but if you are listed as an authorized user on a Capital One credit card then your scores might actually go up once FICO makes the changes to their models. If you are an authorized user on a Capital One card and you are being penalized for their misreporting then you will benefit from the change. In the example above, the credit score would stop evaluating the credit card that shows me as being 86% utilized. Assuming the utilization from all of my other cards is less than 86% I should expect an increase in my credit scores.

I know it’s very “glass half full” of me to point this out but at the very least the two policies that are less than consumer friendly appear to have cancelled each other out in this instance for a few lucky consumers.

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