By Cody Gehman, CPA
The Fair Isaac Corporation, better known as FICO, recently announced an update on how credit scores will be calculated moving forward. This summer they will release two new credit scores: the FICO 10 and FICO 10T. Debt solutions lawyers and financial coaches are chomping at the bit to provide insight on how to improve your score under this new system, but will your score under the new versions necessarily get worse?
The first thing to know – there isn’t just one score.
Ever wonder why you get different scores from different credit bureaus? FICO produces a new version of its credit score every few years, but lenders can choose to use older versions. FICO 8 is still the most commonly used version, but your credit card company might use FICO 9, resulting in a different score. Most lenders seek to limit the risk of changing to the newest FICO score until there is more data to prove its reliability.
Key Changes with FICO Score 10 and 10T
The Wall Street Journal reports that the new scoring calculations will weigh more heavily on those who fall behind on unsecured personal loans. That is important because, according to Experian data, personal loan balances greater than $30,000 have jumped by 15% over the past five years. FICO Score 10T will look more closely at trending data to show the historical trajectory of an individual’s credit behavior, penalizing those whose overall debt level increases over time while rewarding those who are paying off debt aggressively.
Who is likely to be impacted?
According to FICO, credit scores in the low 600s could dip further, while high credit scores above 680 could rise even higher. They estimate that nearly 110 million people will see their scores swing 20 points in either direction.
How to mitigate a potential lowering of your score? The answer is old news.
1. Pay your bills on time. This is extremely obvious. Delinquent payments will have a larger impact on your scoring now. Consider automatic payments if you typically forget to write those monthly checks. Paying more than the minimum will also go a long way in improving your score.
2. Keep balances low. If you have a $10,000 limit on a credit card, consider carrying a balance below $3,000, thus keeping utilization below 30%.
3. Be informed. Run your credit report: it’s free (dependent on the firm you use to run it). You may have an old, forgotten loan that needs to be taken care of, or you might spot an error that needs to be resolved with the lender and/or the credit bureaus.