But the change won’t hurt everyone.
In fact, for a percentage of the population, it could provide just the boost they need. As you monitor the news, here are a few things you need to know about the changes in FICO scoring.
Credit scores are rising
The first thing you should do before you assess how the changes will impact you is to check your own score. If you haven’t looked at your credit score in a while, it may be better than you realize.
Last fall, FICO reported that the average credit score reached an all-time high, at 706. This is due to a variety of factors, including a strong economy and changes in how credit scores are calculated. New standards were introduced in 2017 that required bureaus to exclude medical debts, tax liens, and civil judgment debts from credit reporting.
If you haven’t in the past year, pull a copy of your credit report from all three credit bureaus. You can do this for free by going to AnnualCreditReport.com, where you’ll input identifying information and access your reports. This is known as a soft inquiry and won’t hurt your credit score.
Personal loans may hurt you
Fair Isaacs Corp. may be known for its FICO scores, but it is primarily a data analytics company. To ensure its scoring model remains useful, Fair Isaacs tweaks it every few years, and this latest upgrade, FICO 10, is the first one since 2014.
Some lenders were still using the version that was last upgraded in 2009, though, due to the expense of upgrading to a new scoring model.
The biggest change with this new model is that it will flag personal loans, which have increased in popularity in recent years. You’ll also find that if you fall behind on loan payments, you’ll be penalized more than you were under previous scoring models. The change is designed to better protect lenders, but if you have negative loan activity, you may find your score will drop.
Good credit scores get better
FICO scores range from 300 to 850, and the higher the number, the better the chances of getting approved for excellent credit cards. The scoring breaks down as follows:
- Exceptional: 800-850cre
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Very Poor: 300-579
The majority of consumers fall between 670 and 799. For many consumers, the changes will have little impact as long as they pay their bills on time and personal loans don’t push the score down. In fact, credit score credit reporting expert John Ulzheimer told Consumer Reports that under FICO 10, those who fall in the 670-850 range will likely see an increase.
“People with good credit are going to score higher, and people who have elevated risk are going to score lower,” Ulzheimer says. “That’s just a more realistic way of assessing risk.”
Credit card usage
Another change to the credit model is that it will look at a person’s overall credit card use, known as FICO 10 T. Currently, credit scores rely on a monthly snapshot of your credit card usage, whereas the new scoring model will look at a 12-month overview of your credit card habits. That means if you pay off your credit cards every month, you’re more likely to see a boost in your score than if you run a high balance throughout the year.
“Trending data has better predictive value in terms of assessing risk,” Ulzheimer says. He believes the new scoring model will likely only move a person’s credit score 20 to 25 points.
The change isn’t immediate
According to FICO, the new scoring model will be rolled out this summer under the branding FICO 10 Suite. But there will also be industry-specific scoring to better tailor the information to the specific type of risk associated with various lenders. Although in the past, lenders have delayed transitioning to a new scoring model due to the expense, FICO anticipates lenders of all sizes will make the switch this time due to the reduced risk that comes with FICO 10.
“When we release a stronger, more predictive model, we see that lenders will migrate to the stronger model because it allows them to make more loans to more consumers without taking more default risk,” FICO’s vice president of scores and predictive analytics, Dave Shellenberger, told MarketWatch.
With the new scoring model not available for a while, there are some things you can do to boost your chances of landing a loan in the coming years. The first is to check your credit score to see where you currently stand, accounting for a potential drop of 25 points in the next year.
No matter where your score falls, though, here are some things you should do to ensure you remain eligible for loans when you need them:
- Pay all bills on time – this kind of discipline is crucial.
- Keep credit card balances low.
- Contest false entries on your credit report.
- Work with lenders on payments if you fall behind. There are good options if you have excellent credit, good credit, fair credit, and poor credit.
In breaking down the most important things you should know about the FICO Score 10 Suite, this summer the new FICO scoring model will be available to lenders across the country.
This will affect millions of consumers, and it’s quite possible that many of us will actually see an improved score as a result.