Fair Isaac Corp., the company responsible for producing the FICO credit score, recently announced an update to how the credit score is tabulated. FICO 10 is due to be released this summer. Because the score is so commonly used by lenders (Fair Isaac states it is used in 90% of all lending decisions), your personal score is very important to you as a consumer. It helps determine whether you can be approved for certain loans and interest rate (your cost) for that loan.
Why are there different scores?
In my role as a financial coach, I am often asked why there are differing scores depending on which credit reporting or monitoring resource you use. One reason for the discrepancy between resources can be seen in this most recent news about FICO. FICO 10 is the newest formulation of the score. That formulation is updated every few years with the intention of helping lenders better determine the credit worthiness of an individual.
The old formulations often do not go away. That means that if you get your score from your credit card company, they may be using FICO 9, while your lender may use FICO 8. Stated simply, your score is dependent on the source and the version used by the lender.
What’s different from FICO 9?
The Wall Street Journal is reporting that the new score will judge those who fall behind on payments more harshly and will give greater weight to unsecured personal loans, typically a lower cost alternative to credit cards. Fair Isaac also announced in its press release the addition of a product called 10 T, which will place an emphasis on the borrower’s debt trends. This could be a concern for people whose overall debt level is trending upward over time.
Who does this affect in a good way and a bad way?
Based on comments from Fair Isaac, this change will create greater separation in the 600s. If you are in the lower 600s and struggling to make payments on time, there is a chance your score can go down further. If you are in the high 600s and making payments on time and trending toward lower debt levels, your score could actually increase.
What can I do to mitigate the effect of these changes on my credit score before the changes are set to be implemented this summer?
You have some time to get a few things in order not only because the score will not be released until the summer, but as mentioned above, it takes certain lenders more time to adopt the new scores. However, with the addition of trending data, today would be a good time to start those positive trends. A lot of the existing best practices in credit management are made even more relevant by this change. If you are looking to protect your good score or put yourself on an upward trajectory, here are a few areas of emphasis:
Pay your bills on time. It appears delinquent payments will have an even larger effect on your overall score than before. I know this step sounds simple, but if you miss payments occasionally, you will want to clean this up. If forgetfulness is part of the problem, consider setting up automatic payments.
Get current and stay current. Pull your credit reports and make sure that nothing has fallen through the cracks like a small medical bill. Catching up on those payments may show a positive trend.
Keep your balances low. There appears to be a greater emphasis on credit utilization so paying debt down below your credit limit will be rewarded. Conversely, maintaining your credit balance at the limit will likely drive down your score.
Above all, consider this change as an opportunity to review your overall debt and credit picture. High credit scores are not the “end all be all” of financial wellness, but high interest rate debt is truly costly to your overall wealth. Let this change be the spark to put a plan in place to eradicate expensive debt from your financial picture.
Cyrus Purnell Contributor, Financial Finesse Contributor Group Personal Finance
Contact us today to understand how you could be affected by these FICO score changes in relation to your approval mortgage.