Credit Score Formula is About to Change

Fair Isaac Corp., the company responsible for the popular FICO credit score is changing the way the score is calculated. It is anticipated that it will do a better job at calculating and predicting the likelihood of a borrower defaulting on a loan. In fact, it should help decrease default rates by 5-15%.

The new score will be more lenient on occasional misses but more strict on repeat offenders.

The latest version of the FICO score

will largely look and feel the same to consumers and lenders. Scores will still range from 300 to 850 -- the higher the better -- and the model will continue to look at the same factors, including consumers' level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores.

Millions of people will be affected by the shift. It should help the economy over time, lenders who don't want defaults and in the end the consumer may get cheaper rates and those who have a great history with minor blemishes will not be punished as hard. It could be good for many.