Fair, Isaac and Company, Inc., the San Rafael, California company that pioneered the FICO credit scoring system in use today, is introducing a product they call Next Generation Credit Risk Score. Risk-factor scoring is used in all credit granting situations--including mortgages--and by its new-honed ability to draw upon the highly predicative powers contained in the rich consumer credit databases, the enhanced FICO numbers promise an even sharper image. Although the exact details of how the new scoring system is going to function are information confidential to Fair, Isaac, the outcome to consumers is likely to be a broader, and therefore possibly more forgiving, measurement of a person’s risk as a potential borrower. In other words, if you were in a gray area with your old credit score, the new system might help push your score into the light of credit approval. Looking at the new scoring through the lender’s eyes, the system is set to predict the likelihood of 90-day or worse delinquency in a consumer-lending situation and will therefore rank, in order of seriousness, the risk of serious delinquency, charge-offs, repossessions, foreclosures and bankruptcy for each individual applicant.

To understand the benefit that the addition of next generation scoring may bring to your score, it is important to first understand how basic credit scoring works. FICO scores run anywhere from 300-900, depending on what system is being used. Credit scoring is a process designed to help predict the future; at least the future regarding whether or not you will live up to the credit obligations you incur now. When you submit a request for a loan or for credit, the lender or creditor requests a credit bureau report showing your credit-related history. Credit reports usually come loaded with positive as well as negative information. The Next Generation scoring promises to help cut through this massive amount of information more precisely than the old FICO scoring could.

Based on past experience, Fair, Isaac has determined the most powerful indicators of future credit risk, namely severity, frequency, and recency, and applied these in the making of their Next Generation scoring. They’ve developed models that weigh financial data and produce a score that indicates risk level. Lenders can then decide whether or not they want to extend credit to borrowers who represent that particular level of risk.

Severity refers to a how damaging a situation is likely to be. In other words, a 30-day late payment is not as serious as a 90-day late payment and one late payment is not as credit risky as several late payments, thus the reference to frequency. Recency refers to how recently the credit offense occurred. A credit lapse five years ago is not as risky as a credit lapse only a year ago. If you’ve been paying your bills punctually for the last couple of years, you’re generally in better shape because your recent history is good.

Your available credit may also affect your score. If you have no cards, you have no credit history and thus, no way of showing that you can be trusted based on past performance. If you have too much credit--especially with a sky-high total credit limit or high outstanding balances--you may seem just as risky as a person with no credit. In fact, once you hit seven open credit cards or more, your score may start to decline on that information alone.

According to Fannie Mae’s information, to get down to a score that is considered on the less desirable end of the spectrum, 620 for instance, you’d more than likely have to have 90-day delinquencies, charge-offs, repossessions, or a bankruptcy. Or, if you have none of these, you might receive a lower score because of heavy credit card use, even if your accounts are all current. But a small discrepancy, say one 30-day late payment, won’t drop your score to 620 all by itself.

Really, the only way to help raise any credit score is to pay your creditors on time, every time for at least two years. This is not a guarantee, of course, due to the many unique credit-scoring factors involved in each in person’s report, but a history of borrowing and paying prudently in recent years never hurts your score and, sometimes, can turn your score around more than you might think.

Suppose, for instance, that you had run into some financial problems a few years ago but have kept your record clean since then. You’ve been paying down your auto loan, are current on your credit card debt, and you’re not pushing your credit lines to the limit. Your credit accounts have been open for a lengthy period of time and you haven’t been applying for credit all over town. All of these facts added up equal what is, although not a premium credit score, at least an acceptable risk to most lenders or creditors. Even though, in this scenario, you have had a few minor problems in the past, you have been credit-wise in recent years.

On the other hand, lets suppose that you had acquired all of your credit accounts only recently, using them to their limits (or over the limits), and, at the same time, you were actively seeking more credit. In addition, you’ve already got one late payment on one of your relatively new accounts. Although you haven’t had the past credit problems as in the first scenario, you’d probably be a worse credit risk because you would seem to be not only overextended, but headed for more credit excess and therefore, possibly serious problems in the future.

The lesson here is to request credit with restraint and use it regularly, but prudently. A few credit accounts handled well can go a long way toward keeping your score high or helping to increase it. This, coupled with the new credit scoring, just may cast a brighter light getting the loan or credit you need.

For more information on home mortgages and credit scores, you may visit Fannie Mae at http://www.fanniemae.com and also Fair, Isaac & Co. at http://www.fairisaac.com.