Your credit score could change soon. Here’s why.
Your credit score – that important passport in the financial world – may be about to change. And it won’t necessarily be because of what you did or didn’t do.
The Fair Isaac Corporation, the company that creates the widely used three-digit FICO score, is tweaking its formula. Consumers in good financial health should see their scores rebound a little higher. But millions of people already in financial difficulty can suffer a downturn, which means they’ll have a harder time getting loans or pay more.
Lenders use FICO scores to gauge the likelihood of you making timely payments on your loans. But they are also used in many other ways and can influence the price you pay. car insurance whether you will be eligible to rent a new apartment.
Changes, reported Thursday by the Wall Street Journal, do not edit the the main ingredients of your score, but they have a deeper view of certain financial behaviors that indicate signs of financial weakness.
For example, consumers who consolidate their credit card debt into a personal loan and then accumulate their card balances again will be judged more severely.
“The new scores reflect the nuanced changes in consumer credit trends that we’ve seen from our analysis of millions of credit files,” said Dave Shellenberger, vice president of product management at FICO, whose scores generally range from 300 to 850 (the most).
Here’s what you need to know about the new credit scoring system.
Why change partitions now?
FICO adjusts its scores every few years, drawing on consumer behavior and patterns that emerge from the vast mine of data it tracks. This time, the company offers two new scores, FICO 10 and FICO 10 T, both different from the previous formula.
With the strength of the job market and other factors, many consumers are managing their credit well. Late payment rates on all household debt are at their lowest since at least 2005, according to a recent analysis by Moody’s Analytics, and credit scores tend to rise. (The last time the formula was changed, in 2014, it was supposed to increase scores.)
Despite this, a significant number of low- and middle-income Americans are struggling and consumer debt levels are quite high. And lenders always try to protect themselves from losses if economic conditions deteriorate. FICO says the new scores will make it easier for lenders to assess a borrower’s risk.
What is changing?
Some of the changes, such as taking out a personal loan and credit card debt, affect the two new scores. But there are more substantial changes regarding the FICO 10 T version.
For example, instead of just looking at a static month of your balances, FICO 10T will look at the past two or more years, giving lenders a better idea of how you are managing your credit over time. This should mean that your scores will better reflect the trajectory of your behavior. (VantageScore, a lesser-known score provider that’s a joint venture of the Big Three credit reporting companies, has already built this into its formula.)
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There are also other changes. FICO 10 T will weigh more heavily on recent missed payments and penalize those who use a high percentage of their overall available credit for long periods of time.
This could have consequences for a person looking at credit cards in times of distress, such as a job loss. “But this person is probably a bad credit risk, unfortunately,” said Chi Chi Wu, an attorney at the National Consumer Law Center.
She said she was concerned that lower scores for these consumers could add to their problems, make car insurance more expensive or hurt their chances of finding housing – and make it harder for them to get back on their feet. .
How and when will the changes affect me?
Most consumers – 110 million people – will see modest fluctuations if they see any change, according to FICO. But around 40 million people who already have favorable scores are expected to earn around 20 points, while another 40 million with lower scores are likely to see a drop.
But not all lenders will immediately use the new scores.
People who apply for most mortgages will not be affected, at least for now. This is because home loans guaranteed or guaranteed by Fannie Mae and Freddie Mac, which comprise the vast majority of mortgages, still need to use older versions of the FICO score.
Many other lenders are also using older FICO formulas, and it remains to be seen how quickly they will embrace the new scoring method – or whether they will decide to change.
The major credit reporting companies – Equifax, Experian, and TransUnion – will offer all updated scores by the end of the year. Equifax will be the first this summer, FICO said.
How can I improve my score?
Because the FICO 10T calculation has a longer field of view, it pays to prepare your financial life as early as possible before applying for a loan.
You still want to review your credit reports, which contain the raw data that feeds into your scores, in each of the big three reporting companies. But now you need to plan ahead and check them even earlier, because an error regarding a missed payment can hurt you further, and it may take time to correct the error.
You have the right to check each of your credit reports, free of charge, once a year, through an authorized website: annualcreditreport.com.
The biggest change, however, is in the amount of debt you carry, experts said. In the past, people who tried to hone their scores just before applying for a loan had to pay off their credit cards or get balances as low as possible a month or two before submitting an application. It won’t work as well now.
“Pay off your card a month or two before you apply?” This is no longer the best advice, ”said John ulzheimer, a credit expert who worked at FICO for about seven years before leaving in 2004. “You want to reduce your credit card balances several months in advance, or at least lower them for months in a row. , then have balances at a low before you apply. Your track should be longer now.
Despite the adjustments, the wide five factors that determine your FICO score have not changed. In general order of importance, these are your payment history, the percentage of your credit used, the length of your credit history, your loan mix, and the number of new accounts you have requested.
This means that much of the traditional advice still holds true: don’t make late payments, apply for more credit than you need, and keep your card’s outstanding balances to a minimum.