Exploring the Latest FICO® Score Changes
Sometimes, managing finances can feel like a game—one whose rules aren’t always easy to figure out.
It can be doubly disturbing when those rules change unexpectedly. And according to a recent announcement by the Fair Isaac Corporation, the consumer reporting agency responsible for calculating FICO® scores, that’s exactly what’s about to happen.
Many consumers are familiar with their FICO Score, the three-digit credit rating used by many lenders to gauge a borrower’s creditworthiness. Even if they can’t name the exact number, most credit users likely know it exists.
But it’s less common to have a total understanding of how, exactly, that score is arrived at—and that’s before throwing in a formula change.
For most consumers, however, this FICO announcement is apt to be a total non-issue. And even for those whose scores are affected, there are tons of smart financial moves that can help mitigate the changes and potentially help raise overall creditworthiness.
Here are the deets about the 2020 FICO® Score changes.
What’s Going On with FICO Scores?
While it might be one of the most common, the FICO Score is actually only one of a few credit scores kept on consumers. It’s a three-digit figure between 300 and 850, ranking borrowers’ credit histories from “very poor” to “exceptional.”
Presently, FICO scores are calculated based on five key factors, which are weighted to different degrees:
• Payment history – 35%
• Amounts owed – 30%
• Length of credit history – 15%
• New credit – 10%
• Credit mix – 10%
However, late last month, FICO announced a new formula, known as the FICO® Score 10 Suite , which will change how consumers’ FICO scores are calculated.
The new FICO scores in this “suite” will offer lenders more information about consumers’ payment history over time, including two full years’ worth of account balances. This is, according to FICO , an effort to give lenders “more insight into how individuals are managing their credit.”
While the changes won’t take effect until this summer, it’s important to understand that they could have an effect on existing credit scores. That said, there’s a good amount of subtlety and nuance in this situation.
How the FICO Score Changes Could Affect Credit Scores
Whenever there’s a change in how scores are calculated, it makes sense that some consumers will see a resultant change in their FICO scores.
Dave Shellenberger, vice president of product management at FICO, estimates that about 80 million people will see a significant shift—of at least 20 points—due to the FICO® Score 10 Suite changes. (According to Shellenberger, approximately half can expect their scores to rise, while the other half might expect to see a drop.)
Another 110 million or so consumers analyzed by FICO might see a modest change to their score, or none at all.
So which consumers should expect to see the largest differences? Given the new formula’s emphasis on payment history and debt utilization over time, the most vulnerable are likely those who carry high revolving balances or have a history of missed payments. Scores might also fall for users whose total debt balance has been climbing over the years.
On the other hand, consumers with a low debt-to-income ratio and those who are religious about on-time payments might see an upward shift in their scores.
Generally, though, there’s no reason to overreact to this news no matter how it might stand to affect your score. For one thing, a credit score isn’t the be-all-end-all of financial health (though it can be important for those in the market for new loans and lines of credit).
And for another, the launch of a new FICO score doesn’t dissolve the older models— and not every lender will implement the latest and greatest immediately. For example, the most commonly used formula by lenders is FICO® Score 8, which came out more than a decade ago. In fact, some lenders may use another credit score altogether, aside from FICO’s.
Maintaining Your Credit Score, After the Changes and Beyond
Even with the FICO® Score Suite 10 changes in mind, most of the basic steps toward a healthy credit score remain the same. Keeping low overall balances on debt relative to credit limits and making on-time payments have always been important parts of FICO’s calculation, and maintaining those habits will likely still be helpful after the new formula goes into effect.
Meanwhile, behaviors like keeping a high revolving credit card balance will still work to chip away at user scores after Suite 10 is implemented. But that isn’t even the worst part about revolving credit card debt. High interest rates and compounding interest mean it’s easy to wind up paying more on purchases made with plastic over time.
Another nuance about the new FICO score algorithm is its treatment of personal loans—unsecured loans that can be used for any purpose.
Over the last few years, there has been a proliferation of companies offering personal loans on the market (including SoFi, for instance!). Because personal loans can be used for anything from a trip to Bali to home renovations, a high amount of unsecured debt can be a signal to potential lenders that a borrower may not be financially scrupulous.
But personal loans can also be used to good financial ends. For instance, using a credit card consolidation loan can help users save money on high-interest rates over time, and may even lead to a higher credit score in the long run if it means getting out from under the vicious consumer debt cycle.
SoFi offers personal loans with competitive rates and doesn’t charge extra fees for prepayment or origination.
SoFi also helps its members keep tabs on their credit scores and debt repayment plans with SoFi Relay, a convenient and user-friendly way to get a bird’s-eye view of both long-term financial goals and short-term trends and data. In addition, SoFi members can monitor their credit in the SoFi app with our new credit monitoring tool.
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