People looking to finance a home or a new car may experience a substantial change in their credit scores since the FICO credit scoring model was recently modified. If you are in the market to finance a major purchase, buy a home, or refinance, your ability to qualify for financing may be affected by how the new scoring formula calculates your credit scores.

The specific scoring changes may be a benefit or a detriment to you depending on several new factors. Up to half of all new loan applicants could possibly see their credit scores change by 20 points or more. The new credit score formula, which is used in approximately 75% of lending decisions, is supposed to help lenders minimize their risk by predicting potential defaults better than the old system.

The New Credit Scoring Factors that May Affect Borrowers Include:

Available Credit on Revolving Accounts

The ratio of the current balance compared to the amount of credit available appears to have more influence on the credit model. The less available credit a borrower has on credit cards, the lower the score would be. More available credit would mean a better score. This change could have a broad impact on credit scores used by lenders to qualifying borrowers, if credit card issuers implement more cuts on their maximum limits. A borrower's credit score may drop if the available credit limit is reduced, whether an account has a balance or not.

Total Number of Open Credit Accounts

In the previous model, having too many open credit card accounts was viewed as a negative factor. However, it appears that has been reversed, provided that the accounts have not been delinquent or overused. Now, having more open and active accounts could have a positive effect on credit scores under the new scoring system. A potential negative aspect of this change is that more credit card issuers may close seldom used consumer accounts. From a lenders perspective, underwriters will also have to change how they view loan borrower credit files.

Isolated Instance of Delinquent Credit

Apparently, the new credit score model will be more forgiving to loan borrowers who only have one major negative problem on their credit report. The scoring model calculates the severity and frequency of negative credit items. Depending on the item reported, isolated problems will have less impact on credit scores, as opposed to continuous and recurring late payments and delinquencies. Lenders and borrowers should welcome this change because of the potential upside of good borrowers not being lumped into a category of repeat offenders.

Small Outstanding Collection Accounts

Collection accounts with an original amount of less than $100 are disregarded. Another positive benefit for borrowers with minor debts owed from parking tickets, unpaid library fines, small medical bills, or other disagreements. Infractions like these should no longer affect credit scores.

Authorized Users on Credit Accounts

The previous FICO credit score model allowed for authorized users on credit card accounts to build a positive credit profile without being the primary card holder. While some authorized user data is allowed, the new formula has reduced the ability to build credit based on this method.