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Whether your credit report is pristine or has a few blemishes, your credit score could soon change. Fair Isaacs, a data analytics company that focuses on credit scoring services, recently announced that it will be making some significant changes to its FICO system, the best known and most widely used credit scoring system in North America.
Lenders, including SELCO Community Credit Union, rely on this score to determine the creditworthiness of anyone who applies for a loan, whether it be for a home or a car, or for a credit card or debt consolidation loan.
We have received many questions from our members about what these changes mean for them and what they can do to improve their scores by the time those changes go into effect, which will be as early as this summer. About 80 million Americans will see a change in their credit score of more than 20 points, and many more will see smaller shifts, the company estimates. Some will see their credit scores rise. Others will see a decline. But before considering what you need to do to ensure that the FICO 10 system works for you, a little background on why these changes are being made.
Fair Isaac’s new FICO 10 system, and the alternative FICO 10 T, is aimed at trying to minimize what it calls credit score inflation. One of the major changes will be the separation of personal loans into their own category. The old system often rewarded borrowers who used these loans to consolidate credit card debt, regardless of how they managed that debt. The new system is aimed at helping creditors better identify borrowers who use those loans responsibly and others who run up more credit card debt even after securing a debt consolidation loan.
In addition, FICO 10 is designed to weigh increasing and decreasing debt levels more heavily than in the old system by using 24 months of “trended data.” For instance, a borrower with a history of paying off their credit cards every month who then begins to carry higher balances will have their FICO score negatively affected more than in the past. Delinquent or missed payments are also expected to be more harshly judged than before. Conversely, those who have late payments in the past but have built a more recent record of making payments on time are likely to see a score bump.
It is important to remember that if you already have good financial habits — you pay your credit cards off every month, are never late on your payments and generally manage your loans well — the new system should reward you. For others, a more proactive approach to managing your debt might be needed to ensure that the new FICO system ends up benefiting you. What actions should you take?
- Don’t be late on a payment. Even those who typically manage their debt well, but forget a payment, will be negatively impacted by the new system more than in the past.
- Reduce your credit card debt. Keeping your balances low is a good strategy regardless of the FICO system changes. But showing a consistent record of paying down debt, month after month, should give you a boost over the previous system.
- Using personal loans to consolidate credit card debt is still a good financial strategy to help pay down debt. But borrowers should be smart about how they use those loans. Acquiring a personal loan and then running up more credit card debt will negatively impact your credit score more than ever before.
- Check your credit report now and correct any errors you might find. The new system will take into account 24 months of data, and a misreported late payment could have a greater effect than before. Checking your credit report for any errors now could head off trouble.
The same basic strategies that work now: making on-time payments every month, keeping credit card balances low and being judicious with how often you apply for credit and for how much, will benefit your credit score regardless of changes to the FICO system.
