Fair Isaac Corporation, the entity responsible for generating your FICO credit score, has announced the upcoming release of two new scoring models later this summer. This article delves into the modifications within these models, the potential impacts on your credit score due to this transition, and proactive measures to maintain a favorable credit score. Continue reading to equip yourself with the essential knowledge for the times ahead.
What Constitutes a FICO Score? A FICO score is a three-digit credit assessment representing an individual’s creditworthiness based on the information contained within their credit reports. This numerical score aids lenders in assessing the probability of loan repayment, consequently influencing loan approval rates and determining borrowing costs.
There are various credit scoring systems, with FICO scores being the most prevalent. The FICO model considers five key factors:
- Payment history (35%): Your track record of timely payments.
- Credit Utilization (30%): The proportion of your current credit usage compared to your total available credit.
- Length of credit history (15%): The duration for which your credit accounts have been active.
- New credit (10%): The frequency of opening new accounts in a short timeframe.
- Credit mix (10%): The distribution of your available credit between credit cards and installment loans like mortgages or personal loans.
Regarding what qualifies as a good FICO score, the available scores range from 300 to 850. A higher score indicates a greater level of creditworthiness.
How does the new FICO scoring system operate?
Primarily, the alterations introduced by FICO 10 and FICO 10-T in the FICO credit score will not fundamentally change the essential components of an individual’s score. Instead, these changes will assign greater importance to certain consumer behaviors, particularly those signaling financial vulnerabilities.
For example, individuals who consolidate their credit card debt into personal loans but subsequently accumulate new balances will face more stringent evaluation under the revised FICO criteria.
Furthermore, instead of focusing on a snapshot of consumers’ credit behaviors over a single month, FICO 10-T will consider a 24-month period of trended data. This extended data range will reveal valuable insights, such as whether a person consistently pays their balances on time or tends to increase credit utilization during the holiday season while maintaining lower levels throughout the rest of the year.
This data is perceived to offer a more predictive view of a consumer’s long-term spending patterns. Consequently, it provides lenders with a clearer understanding of how clients manage their credit over an extended duration, enabling them to make more informed lending decisions and better assess risk levels.
How will the new FICO scoring system impact credit scores?
FICO estimates that approximately 80 million individuals will witness a shift of 20 points or more in their credit scores due to the implementation of the new scoring models. Among these, approximately half will experience an increase in their scores, while the other half will observe a decrease.
Amit Chopra, Managing Partner of Forefront Wealth Planning and Asset Management in Ramsey, N.J., mentioned, ‘If you already have good credit, this new system will more than likely improve your credit score. Conversely, if you have a poor credit score, this new system will likely cause it to drop further.’
Those individuals with a significant amount of credit card debt in relation to their total credit or who have recently missed payments might witness the most substantial drops. Conversely, individuals with low balances and a history of timely payments are more likely to experience an increase.
In addition to the aforementioned 80 million, FICO predicts that another 110 million consumers will see minimal to no change in their scores due to the new scoring system.
In order to enhance your score in the revised system, prioritize paying off your credit card balances each month,” Chopra advised. “Moreover, ensure punctual payments, as this aspect will bear considerable significance in the updated computations.