FICO is one of the leading credit scoring organizations in the country. They have been a port of call for lenders in all sectors for 25 years. In 2020, FICO’s updated model has changed the game. It’s left ordinary people wondering whether this new scoring system will help them or hurt them.
There are a lot of factors to take into account. Still, the rules on maintaining and strengthening your credit score have mainly remained the same, according to financial advisors Pennon Partners.
Only One Model is Impacted
There is a range of credit scoring organizations aside from FICO. Within FICO itself, there are also multiple credit scores in place.
The reason for this is that different credit scores are designed to emphasize and reduce the importance of specific factors. Remember, a credit scoring model is forever trying to give the best reflection of consumer behaviors.
These latest changes only impact FICO Score 10. If your lender isn’t using the FICO 10 model for assessing loan applications, you don’t need to worry about any of these changes.
The problem is lenders are rarely transparent about the credit scores or models they prefer.
Why Credit Score Inflation has Changed the Whole System
The chances are your credit score is higher than ever. That is due to a phenomenon known as credit score inflation.
It all stems from a legal settlement where the three leading credit reporting agencies agreed that they would remove tax liens and tax judgments from all credit reports. Millions of Americans saw their credit scores rise, with an all-time average high of 706 under FICO.
Of course, many lenders were upset with this as they claimed many Americans didn’t deserve the high credit scores they now had. It also made it much more difficult for lenders to determine which borrowers were a risk.
The new scoring model claims to reduce credit card defaults by up to 10%, according to FICO.
How has FICO 10 Changed?
Before we discuss whether these changes are beneficial to consumers, you need to understand how FICO 10 has changed.
The main alteration to FICO 10 is the introduction of trended data to assess consumers and their behaviors.
What this means is that FICO 10 will use both credit balances and the utilization ratios of today to form the foundation of your score. That differs from before in that current credit was the sole basis used to determine a person’s credit score.
The philosophy behind the new FICO 10 is to examine both recent history and previous behavioral trends. Lenders will, therefore, have a better chance of figuring out whether a consumer presents a high risk.
Under this system, FICO says that 40 million Americans could see their score rise by up to 20 points, whereas another 40 million Americans may see their scores drop. The majority, however, are expected to remain unchanged.
FICO 10 is expected to come into force by the end of 2020, so there’s plenty of time to prepare for it.
Now, it’s time to see whether this is good for you.
Sudden Debt Spikes Won’t Kill You
A sudden spike in debt can cripple your credit score as it stands. That has been a long-standing point of criticism as someone can be classified as a dangerous borrower simply because they experienced a medical emergency.
The new system should prevent a ruined credit score only because of an unexpected expense. Since the new credit scoring system takes into account long-term behaviors, unexpected debt shouldn’t cancel about previous sensible borrowing behaviors.
Debt Levels Could Cancel Out Credit Utilization Ratios
When it comes to the old rule, you could have a high debt level as long as your credit utilization rate did not pass 30%. That could change under these new rules.
A debt load trending upwards would now be taken into account more stringently. Even if your credit utilization rate is at acceptable levels, lenders could soon see you as a riskier prospect.
How Could FICO 10 Help With Your Retirement?
Retirees borrow money too. Perhaps you’re looking for a mortgage on a retirement home? Or maybe you’re looking to increase the size of your car so you can travel? Your credit score still matters. When you have little to no income from a salaried job, every dollar counts.
With unexpected medical events and other bills playing a more significant role in the lives of retirees, a high debt level could unfairly penalize retirees.
That could make it more difficult for seniors to enjoy their retirements the way they want.
How To Make Sure That You Don’t Get Stung by FICO 10
FICO 10 isn’t yet in place, so there’s almost a full year to prepare for the new criteria. You may be surprised to learn that most of the rules for maintaining a gan excellent credit score haven’t changed. However, certain aspects of improving your credit score have become more vital than ever.
Always Pay Your Credit Card Bills on Time
Late payments have always been a significant problem for your credit score. However, now they could trigger a more significant credit drop than ever before.
When a lender sees a history of not paying on time, they automatically assume you have a problem covering your debts, even if this isn’t the case.
Pay Your Credit Card Bill in Full
For people with a lot of bills, making the minimum payment was an easy way in which to make a payment every month without suffering the consequences of a busted credit card score.
With this renewed emphasis on debt load, making just the minimum repayment could see your credit score decline.
Paying off your bills in full should be carried out for 24 months to maintain a good credit score.
Take Personal Loans But Maintain Credit Utilization Ratio
By all means, don’t run from personal loans, but watch your credit utilization ratio. You can still take out personal loans for vacations and emergencies, but make sure you pay everything off in full at the end of the month.
And don’t allow yourself to climb above a 30% credit utilization ratio. That should stop you from suffering under the FICO 10 system.
Final Words – Don’t Get Too Hung Up on FICO 10
It’s easy to see a new model like this and panic. But the changes are relatively minor, and someone practicing good financial habits shouldn’t experience any issues with FICO 10.