Hoping to offer lenders a more effective way of predicting which consumers are likely to default on their accounts, the Fair Isaac Corporation, has revamped the 20-year-old formula it uses to determine a consumer’s FICO score — the credit score most lenders use to determine who can qualify for a loan or new line of credit.

The company says the new formula, updated for the first time since it was introduced in 1989, will improve the predictability of defaults by 5 to 15 percent (“New Credit Scoring System Ready for ’09,” Kiplinger Business Resource Center, Dec. 12, 2008).

FICO scores will still range from 300 to 850 points, but Fair Isaac estimates that borrowers could see their scores increase or decrease by more than 20 points, because the formula “has a few more gray areas fleshed out,” says Ginny Ferguson, a member of the board of the National Association of Mortgage Brokers.

Two of the three major credit reporting bureaus will start using the new formula by the spring.

Who Benefits from the New FICO

Borrowers with minimal credit problems: The new formula is more forgiving to borrowers with infrequent hiccups on their credit, ignoring small collections under $100, and is less punishing to individuals with one major transgression on their credit report, such as a charge-off or repossession, if their credit history is otherwise strong. Fair Isaac says the new formula will create a greater distinction between these borrowers and those who are habitually delinquent.

Borrowers who keep their credit accounts open and active: The new FICO formula will look more favorably on individuals with multiple open accounts, but will come down more harshly on those who have had their accounts closed — a more frequently occurring scenario now that lenders are targeting and shutting down the unused and unprofitable accounts of thousands of borrowers.

Who Loses Out with the New FICO

Authorized Users: More than 30 percent of U.S. credit card holders — some 60 to 70 million consumers — “piggyback” on someone else’s credit. These authorized users — often young adults or spouses — rely on a relative’s credit to help jumpstart or bolster their own credit history. The new FICO formula won’t eliminate this option, as had once been proposed after people began abusing the option, but it will make establishing credit as an authorized user a more difficult and lengthier process.

Borrowers with little available credit: With lenders slashing credit limits across the country, millions of individuals could see their scores drop based on the new FICO formula, which will be even more sensitive than the classic FICO to how much available credit borrowers use. Even borrowers who diligently pay off their balance each month could see their scores dip.

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