Thanks to a new scoring model, your FICO score may change this summer.
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- FICO is launching a new scoring model this summer, called the FICO Score 10.
- The new model will take into account a consumer’s account balances and missed payments over the last two years.
- About 40 million consumers will see their scores drop as a result.
A whopping 110 million Americans will likely see their credit scores change this summer, thanks to a newly announced credit scoring model from Fair Isaac Corp.—the company behind FICO scores.
Though some consumers may see a bump in numbers, about 40 million will their scores drop—likely around 20 points, according to Fair Isaac reps.
The new approach will weigh delinquencies—particularly those in the last two years—more heavily than past models, putting borrowers with late payments on their records at a disadvantage. Consumers with a history of high utilization ratios (the amount of credit you use vs. what you have available) will also see their scores drop.
Additionally, Fair Isaac has said it plans to flag borrowers who apply for personal loans, which are generally considered riskier than other financial products.
Here’s how Dana Marineau, vice president at Credit Karma, sums it up: “The new model now incorporates consumers’ debt levels, taking into account account balances for the previous 24-plus months, while prior FICO scores have focused on more recent account balances. Consumers who fall or have fallen behind on paying their debts, as well as those with high credit utilization ratios in the past two years, will likely see a decrease in their score.”
For borrowers with already good credit, the new model will likely provide a boost. On loans and mortgages, it could even mean additional saved on interest and fees for this cohort, according to Mat Ishbia, president and CEO of United Wholesale Mortgage.
“A more accurate picture of a borrower’s credit will not hurt,” he says. “In fact, it can help. Anytime a scoring model is more accurate, it’s better for consumers because there’s a lot of consumers who aren’t getting the credit score they deserve. For example, if someone has a 690 but really should have a 700 they’re missing out on lower fees and rates that the higher credit score would get them.”
The real winner here will be lenders, though. According to Fair Isaac, the new model should reduce defaults significantly—particularly for lenders who issue mortgages. Fair Isaac estimates that credit card companies could reduce defaults as much as 10% under the new model, while auto lenders could decrease their rates by about 9%.
Mortgage lenders, though? “The reduction in defaults is even higher for newly originated mortgage loans, at 17% compared to the version of the FICO Score used in that industry,” Fair Isaac reports.
That last sentence is the telling part if you’re thinking of buying a home this year. According to Rylie Hendren, capital markets data scientist at online mortgage lender Better.com, the bulk of the mortgage industry uses FICO Score 4—a model launched in 2004—when evaluating applicants.
Though there’s a chance the FICO 10 may be used in the mortgage process down the line, Hendren says we’ll likely have some significant notice before the change is made.
“As [Fannie and Freddie] have done with all releases since, it will be reviewed and, in the event it gets adopted, it will be made very clear publicly,” Hendren says.
If lenders do start using the FICO 10 to evaluate mortgage applicants, potential homebuyers will need to take extra steps to prevent late payments, which could ding their score, leading to higher interest rates and less favorable loan terms.
Here are some other tips to help manage your score under the new model:
Know where you stand.
“Knowledge is power. Your scores may vary, but they’re all based on the information in your credit reports. Checking your reports regularly can help you see what’s impacting your score so you know where you could improve.” – Marineau
Try to pay your credit card balances down early—before their monthly due date.
“One tricky point about credit card utilization rates is that your usage depends on the balance that your card’s issuer reports to the credit bureaus, not how much you spend each month. Those two numbers aren’t always the same. What this could mean is that your issuer may report your billing cycle’s balance before you pay it off.” – Marineau
If you’re already a homeowner, stay on top of that mortgage payment.
“Your history of paying your mortgage on time will have a larger role in your FICO score than it previously had,” she says. “If you missed payments in the last two years, the new version of FICO score will cause your score to decrease more significantly than it would have in the previous version.” – Hendren
Reduce your spending where possible.
“If you cannot afford to make full or even partial payments early, stop using your credit cards to make purchases. Switch to a debit card or cash for necessary purchases.” – Marineau