As if you needed another reason to improve your credit score...

A new model of the FICO credit score—called FICO 08—was rolled out in August and although some of the changes are subtle, these changes could affect your credit score quite dramatically—especially if you have less-than-perfect credit. On the flip side, however, if you already have good credit or are on your way to improving your credit, these changes could mean a better score for you.

One of the changes to the scoring system is that your credit score is now much more affected by your ratio of total credit balance to total credit limit. The old reporting system was somewhat forgiving of a high credit balance in relation to total credit available, but the new model negatively impacts those whose credit balances are closer to their credit limits. To avoid having your credit score affected by this change, it’s a good idea to keep your credit card debt—at any one time or as an overall average—to no more than 30 percent of your total credit limit.

The second change concerns missed or late payments of smaller amounts. Under the new guidelines of FICO 08, outstanding collections of less than $100 will no longer be harmful to your overall credit score. If, for example, you missed a utility bill or have an outstanding parking ticket on your credit history, you will no longer be penalized for those minor infractions as long as the original amount (without any late fees or service charges) is under the $100 threshold. Also, in conjunction with this change, you’re less likely to be penalized for any single late payment if it occurred more than two years ago—as long as the rest of your credit history is unblemished.

Finally, the third major change to the FICO credit scoring system deals with “piggybacking,” which is the practice of a borrower with poor credit piggybacking onto another person’s credit accounts in order to raise their credit score. With the new model, adding “authorized” users to an account will now raise a red flag for both the authorized user and the account holder. The piggybacking user will not see a bump to their credit score and the account holder could be penalized—or disqualified altogether for a future loan. This change was made to prevent the misrepresentation of a borrower’s true credit rating.

Although all banks and all lenders haven’t adopted FICO 08 as of yet, almost all are expected to do so by the end of the year. Currently, all three of the big credit reporting agencies—TransUnion, Experian and Equifax—do use the new model, however, so if you’re applying for a loan in the near future, be prepared for the changes. ∆