Fair Isaac Corp. announced the launch of its new FICO score model, FICO 10 Suite. According to some estimates and CNBC reports, will likely to impact the credit scores of more than 110 million consumers. The good thing is that this changed metric does not automatically mean that your credit score will lower, or even if it does, will lower greatly. Regardless, there are ways to ensure that you can improve or maintain a high FICO score to keep the benefits when it comes to lending and financing.
The model for FICO scores is based on five factors:
- Payment history (constitutes 35% of score valuation)
- Credit utilization (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
A Glance At The New FICO changes
The latest model for “FICO Score 10 Suite” (including FICO Score 10 and FICO Score 10 T variants) is going to weigh personal loans more heavily, and penalize the borrowers who consolidate debt with personal loans and then go for racking up even more debt, as per Wall Street Journal reports.
FICO Score 10 will continue to consider the five main factors used in previous FICO models to determine your score – payment history, amounts owed, age of credit history, credit mix and new credit accounts. While the model for “FICO Score 10 T” (the T stands for trended data) has incorporated trended data for the past 24 months. This means that those consumers who have been working hard to make their payments on time in the past two years will be rewarded for their work while those who have amassed more debts during the same time will see their scores dropped. The new Fico 10 is being offered both with and without the T.
Why Is Your FICO Score Important?
FICO scores are a type of credit score used by lenders, along with other details on borrower’s credit reports, to assess credit risk and then determine whether to extend credit or not.
In layman terms, these scores serve as an analytical tool to gauge the financial responsibility and capabilities of an individual. These scores range between 350 and 850, and generally a score above 650 means a good credit history. Those with a score below 620 often have to face difficulties in getting favorable interest rates when borrowing, or find it difficult to obtain financing altogether.
Even though FICO score is one of the many things that make part of the decision process for lenders, it is the most commonly used metric and thereby one of the most significant measures for lenders. Other factors included are the bank account details, job profile, income levels, and length of applied-for-credit, etc. There are other types of credit scores as well, but FICO score remains important for lenders when it comes to mortgages, personal bank loans, and several other types of financing.
How Is The New Model Likely To Impact You?
The first thing to note here is that the underlying criteria for different versions of FICO remains quite similar, but the final ratings can vary drastically for different types of financing. This is why a consumer needs to be aware that the score he or she is provided by their credit card company might not be the same as the one calculated by their mortgage lender. It is equally important not to get hung up on which scoring system is most likely to be used by a specific financer while applying for a loan.
At the end of the day, if you have been paying your bills on time, keeping your balances as low as possible, not applying for huge amounts of credit over and over, and not amassing credit too often, your scores will remain high.
Keep An Eye Out On Your Credit Balances
Now with the above information in mind, coupled with the changed focus areas for new FICO credit score, the change you will experience will depend on your previous credit habits with more emphasis on the past 24 months. If your balances have been low for the most part of the past two years and you have not been struggling to make payments on time, you will likely see an increase in your score. Expect a fall in your scores if you have had high balances, late payments, and have borrowed heavily during the same time period.
Another thing that will now be important to know is if you have been avoiding paying your credit card debts and using balance transfers instead, the new rating system can punish you. It should not come as a surprise, however, because not paying your credit card debts already has the built-in consequence of higher interest payments. The effect of late payments will be only more enhanced now.
Watch Out for Debt Consolidation
Same goes for debt consolidation. If you have an unsecured personal loan and you have been handling your finances well since after you received that loan, you will get a boost in your scores. Likewise, if you have not been making timely payments or paying down your debts, your FICO score will go down. The inclusion of past behavior will be brought to light the revolving debts of consumers, and that it will specifically highlight the risky behaviors of borrowers when it comes to personal loans. This is even more important if a borrower does not have any installment loan or prior repayment experience.
All in all, good credit habits will improve your credit score and missing payments or heavy borrowing will impact it negatively. FICO scores are no different. Improve your credit habits and you will see your score going up, regardless of the new FICO score changes.