How Recent FICO Changes Affect Your Credit Score
On January 23rd, the Fair Isaac Corporation announced the latest release of their FICO score suite, which will be available for lenders to start using sometime this summer.
What is a FICO score?
The Fair Isaac Corporation (FICO) is the oldest and best-known credit reporting agency. Your FICO score is intended to help financial institutions and other lenders estimate your likelihood to pay them back any borrowed money. It impacts the interest rates and length of loan terms at which you may be approved, and it can even have an impact on the approval and terms of various insurance and utility companies.
Why is FICO changing?
FICO comes out with an updated scoring system every few years. The goal of the latest update in FICO scoring is aimed to better assist lenders in predicting customer's trends in order to make decisions on lending easier. According to the company, the new scoring system will outperform all its predecessors. FICO states that lenders will be able to reduce their defaulted portfolios by up to 17 percent under the new suite.
How is FICO changing?
The new suite of scores is called the FICO 10 score suite. It gives lenders a more precise assessment of your credit risk by considering trended data. This trended data is collected by reviewing how you have managed accounts on your credit report within the last 2 years, differentiating from the older FICO suites, which only gave a one-month trending snapshot.
Your monthly payments in credit cards are weighed higher under the changes. Lenders can now see how much you pay on your credit card balances every month. Consumers who pay off their balances in entirety every month will be considered low-risk customers. The trended data will also show lenders if your overall credit card balances are lessening or rising over time, which can add to your credit risk.
Late payments and credit utilization will also have a higher impact on your score. Your ratio is your credit card balances compared to your total credit available. For example, if you have 30,000 in available credit and 10,000 in credit card debt, your ratio would be 30%. The lower your percentage, the better your score.
Personal loans have a better chance of decreasing your score under the 10 suite. For example, if you have taken out personal loans to pay off credit card debt within the two years and in turn have racked up more credit card debt, your score is likely to decrease even more.
Effects on your current score
Most likely, if you currently have a good credit score (670 and up), you're more likely to have an even better score under the 10 suite. Conversely, if you have a low score, that number is more likely to decrease even more. The good news for people with low scores: FICO score 8 is still the most widely used version amongst lenders, thus the changes are not likely to have a considerable impact at this time. The traditional aspects that go into affecting your credit score aren't changing. FICO score ranges will remain as low as 300 and as high as 850.
The bottom line: What you can do
Best practices to attain a good credit score aren't changing. However, paying closer attention to your credit utilization ratio, paying monthly credit card balances in full, and making sure you aren't missing payments will greatly pay off. To keep your credit utilization ratio low, avoid closing out unused credit cards. Also, since the FICO 10 suite looks back further into your credit history, planning far ahead for lending needs is advised more than ever.