More Credit Score Changes Looming
Below is a MRR and PLR article in category Finance -> subcategory Credit.
Upcoming Credit Score Changes
Summary:
Capital One is set to begin reporting credit limit information to FICO, which may lead to changes in credit scores for many.
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Article Body:
In June, FICO announced an update to its credit score calculation formula used by the three major credit reporting agencies. This update will no longer consider an authorized user account as a valid cardholder, potentially impacting over 30 million U.S. cardholders with a possible dip in their credit scores.
Recently, Capital One revealed plans to start reporting the credit limits of their cardholder accounts for the first time. How will this impact you?
This policy change from Capital One could influence the credit scores of some cardholders. Since FICO calculates about 30% of its score based on the credit-to-debt ratio, having precise credit limit data will enhance the accuracy of their scoring. However, the actual impact will become evident only after these changes have been implemented and processed through the FICO system and credit reporting agencies.
Currently, only Capital One and American Express do not include credit limit information when reporting account data to FICO. Opinions vary regarding the effects of this policy. Some suggest that not having the credit limit causes FICO to assume the outstanding balance as the credit limit, which makes it seem like cards are always "maxed out," potentially harming one's credit score. They believe that once Capital One begins reporting credit limits, customers might see an increase in their FICO scores and a subsequent decrease in interest rates.
However, this belief may not hold true.
Fair Isaac Corporation (FICO) has been assessing consumer credit-worthiness for over 50 years, and 99 of the top 100 U.S. banks rely on FICO's data for financial decisions involving billions of dollars. The FICO score isn't derived from a straightforward formula; rather, it's a complex, dynamic algorithm that is both adaptive and predictive, and is a closely guarded trade secret. It's reasonable to conclude that FICO accurately handles the data from Capital One and American Express, estimating realistic credit limits. This is further evidenced by the fact that American Express customers don't suffer adverse effects despite AMEX's policy of not reporting limits; in fact, having an AMEX card can enhance a credit score.
Consider a simple example of how a credit limit might be estimated: if you used your Capital One card to purchase a $3,000 television four months ago, FICO could infer a credit limit of at least $3,000 for your account. The actual limit might be set higher, based on the likelihood that you didn’t max out the card. This inferred limit could adjust according to your overall credit score and financial situation. It's important to remember that FICO has access to a vast amount of historical data.
Once the dust settles from this reporting change, most Capital One customers will likely see their scores remain relatively stable. Some scores may rise slightly, while others might dip a bit. More intriguing, perhaps, will be observing how accurately FICO has been estimating the credit limits for account holders from these two companies.
You can find the original non-AI version of this article here: More Credit Score Changes Looming.
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