What You Should Know About the Upcoming FICO Score Changes
How much debt you have, when you pay your bills, and how long you’ve had your accounts open — these factors can all impact your credit score, sending it up or down at a moment’s notice.
But something else that can affect your score? That’d be the way that score is calculated.
And pretty soon, one of the biggest scoring models out there is getting a makeover.
FICO Scoring Model to Change This Summer
Fair Isaac Corp. — which issues FICO credit scores — just announced last week that it’s launching a brand new scoring model, dubbed the FICO Score 10.
The model will still have the same range (300 on the low end and 850 on the high end), but the individual factors that influence a person’s score will change. Here’s what the company has said will be different about this new approach:
- It will widen the gap between good credit consumers and bad credit ones. People with decent scores will probably see a boost, and those with scores on the low end will likely see their scores drop once the new scoring model takes effect.
- It will weigh late payments, missed payments, and other delinquencies — especially those in the last two years — more heavily. Your credit utilization rate over this period (your balances vs. how big your credit line is) will also play a big role.
- It will “flag” consumers who apply for a personal loan. Because these are unsecured financing products (not backed by collateral like a house or car), they’re considered a risky move by most lenders.
- It will look at “trends” in your spending. If your balances and debts have been trending upward over the last 24 months, that will result in a lower score than if they held steady or declined.
According to the company, the changes are designed to reduce risk levels for lenders. In fact, it’s expected to cut down on car loan defaults by 9%, credit card defaults by 10%, and mortgage loan defaults by 17% for lenders that choose to use it.
How to Safeguard Your Score Under the New Model
All in all, Fair Isaac estimates that about 110 million consumers will see a score change once the new model hits, which should be sometime this summer (no official date has been announced yet). On average, the company says consumers who are affected will see a change of about 20 points either way.
Want to try to make sure your score sees a boost and not a drop? Here’s what you may want to focus on as we near the new model’s launch date:
- Don’t miss a single payment. Set up automatic bill pay for all your accounts — credit cards, student loans, mortgages, and even your utility bills if you can. Late payments are going to hurt your score considerably under the new model, especially if they’re more recent, so take steps to avoid them at all costs.
- Keep your balances low. Stay far away from that credit limit if you can. Generally, you should aim to keep your utilization to 30% or less. So, if you have a card with a limit of $10,000, you wouldn’t want a balance of more than $3K on it at any given time.
- Don’t add more debt. Because the new model takes trends into account, you don’t want rising debts/balances on your record. Try to pay down your balances or, at the very least, keep them steady month over month.
- Pull your credit report now. Go ahead and get your free credit report (you get one annually from each of the three credit bureaus), and see where you’re at. You should make sure there are no accounts showing late or missing payments and, if there are, take steps to resolve those issues as soon as possible.
- Avoid personal loans. Personal loans typically come with high interest rates and, what’s worse, they’ll now get you flagged as risky under the new scoring model. Try to steer clear of these products unless there’s no other choice.
You should also try to reduce your debts and credit utilization, as it could improve your score — particularly once the new scoring model hits. And a higher score? That could mean lower rates, better terms, and more money the next time you apply for a loan or card (or buy a home).
The Bottom Line
Your credit score is important. It impacts what financial products you’re eligible for, it influences your interest rates on loans, credit cards, and mortgages, and for many people, it’s even used to set your insurance premiums, believe it or not. Make sure you’re aware of your score and take steps to safeguard it — both now and under the new scoring system.
Want to know what loan terms you’d qualify with your current credit score? Get in touch with an Embrace loan officer today. We’re here to guide the way.