As of January 23rd, the Fair Isaac Corporation has released their newest credit scoring model, FICO Score 10. which may signal a substantial change for consumers and companies alike. A FICO score evaluates financial history and calculates a consumer’s credit risk. Factors such as payment history (35% of your score), credit utilization (30%), and credit age (15%), are all large contributors to one’s overall FICO score. Expected to impact over 110 million consumers by as early as this summer, FICO 10 will be factoring on-time payments, and personal loans with greater weight, and many riding the line between good and bad credit will see the most change, for better or worse, by as much as 20 points. What might this change mean for lenders and consumers and what can be done to ensure we remain on the positive side?
Automate your Payments
It may seem obvious, but it is becoming even more critical to pay what you owe, when you owe it, especially with the advent of the new FICO model. Senior CNBC money writer Megan Leonhardt warns current debt holders that they “could see lower FICO credit scores in their future, especially if they miss payments.” Automating your payments with AutoPayPlus can help you set and never forget to make on-time payments, taking the pressure off your responsibility to the largest contribution to your overall credit score. As an AutoPayPlus customer, you can always check in on your loans and your credit all in our online portal.
Avoid Personal Loans and taking on new debts
Many have taken advantage of debt consolidation services to manage credit card and other debts. Lenders utilizing the new model are estimated to see a reduction of at least 9% on defaults, due to the weight of Personal Loans, or newly acquired debt on the overall score. Better consumer performance is better for you, for your lender, and for future loan terms as a whole. Especially with the numerous bills and expenses we pay monthly, utilizing debt consolidation services allow for a more stable payment plan. Furthermore, developing that consistency in repayment can assist you in building better credit overall.
Monitor various scoring models
According to personal-finance reporter Jacob Passy, “New versions of the FICO score are coming, but that doesn’t necessarily mean you’ll have a harder time getting a loan.” Simply put, lenders and credit institutions utilize a wide variety of FICO scores, not necessarily the most recent version. As industry analyst Ted Rossman puts it, “Just like many of us are using older iPhones or computer operating systems, your lender might be using an older credit scoring system.”
Overall, we should be considering how often lenders enact new systems within their process. There are a number of lenders that are still only using FICO 8, as well as lenders that have only just recently switched to FICO 9. Because of this, some view the upcoming FICO changes as little more than a non-issue for consumers.
Perhaps lenders may not switch to FICO 10 at all, as another common scoring model is the VantageScore, which is jointly owned by three major credit reporting companies: Equifax, Transunion, and Experian. There are specific differences between the VantageScore and FICO score; for one, the VantageScore encompasses all three of the major credit reporting companies information, while the FICO score utilizes a specific scoring model for each credit reporting company individually. Another major difference revolves around timing. TO receive a FICO score, one’s account must be a minium of six months old. Conversely, a VantageScore can be received on any account, regardless of its age. You can find more information about the differences between FICO and VantageScore here.
Ultimately, it all comes down to awareness and preparation. Even subtle changes to one’s FICO score could be the difference between your loan being approved and otherwise. As such, it is increasingly important to understand one’s financial goals, the resources available, and taking the necessary steps to increase your FICO score if needed. Websites like Nerdwallet and Forbes are essential in informing the public to making responsible, informed financial decisions. Especially since FICO 10 is now incorporating more of one’s overall debt into its final FICO score, understanding and being aware of your past and current debts can keep you ahead of then game when applying for your next loan.