There has been a lot of press surrounding the release of Fair Isaac’s new credit scoring system, FICO 08, and in my opinion the new FICO has been overhyped.   Nevertheless, both consumers and creditors should be glad to have it since it is a marginal improvement in the critical area of credit risk analysis.

The benefit of an improvement in this area must be understood in light of the credit industry’s reliance on the shared responsibility of all borrowers. In such a system, even the most responsible borrower suffers due to flagrantly irresponsible behavior by others.  Wide spread credit problems, then, have a disastrous effect for all borrowers—those who pay their bills on time as well as those who don’t.  Right now, the general condition of credit throughout America is hurt by the awarding of loans to individuals who can’t pay them back.  Any improvement in this area will better separate people who are good credit risks from bad so that banks can do better in distinguishing who should get a loan.  Ultimately, this leads to fewer losses for the banks and allows them to pass savings on to borrowers who are reliable.