There could be big changes coming to your credit score thanks to a new scoring model. The Fair Isaac Corporation (FICO) announced on January 23 that the newest model of their credit score system will result in credit score changes for many people. It is expected that credit scores for nearly 110 million consumers will experience a change of 0-20 points in either direction, while roughly 80 million consumers will experience a change of 20 or more points to their credit score. Not sure which group you will fall in? We’ve got some tips on what to expect.
Will my score increase or decrease?
Under the current credit score model, scores are calculated based on a snapshot of a consumer’s credit situation from the previous month. With the newest model, a two-year window will be monitored in order to track trends in debt and credit utilization. These changes will mostly impact those that have a substantial increase in revolving debt like credit cards, a trending rise in credit debt, or those that take out a personal loan to consolidate credit card debt while continuing to add debt to their credit balance. Those that simply have large mortgages or significant student loan debt should not see a decrease in their credit score under this new model if they continue to make their payments on time.
Some consumers may even see an increase in their credit score under this new model. Because the FICO 10 model will use data trends instead of a snapshot, those that have been practicing good credit habits over the last few years may see a small score increase. Additionally, since the new FICO model uses the previous two years of debt levels, having a month that requires a consumer to use more credit than normal will not penalize them as severely as the old model if the balance is paid off quickly.
What does this mean for me?
If you have a long-standing history of good credit behavior, this change in scoring should not hurt your score, in fact, it could help your score. Those that will be most negatively impacted will be those with high balances that have been increasing over the last two years and those that do not have a strong payment history. If you previously engaged in poor credit practices but have recently reduced debt or stopped making late payments, your score may decrease in the short term under the new model. If you have recently turned around your credit usage behavior and see your score drop, it is important to be patient and know that continuing to use credit responsibly will ensure a continued improvement of your credit score.
Because the new FICO score will be calculated using the past two years of credit history, it is more important than ever to make sure that you are making payments on time and paying the minimum balance on your credit cards every month at the very least. The other key elements of the credit scoring model will not be changing, so payment history, amount owed, credit mix, length of credit history, and new credit inquiries will all continue to have the same impact on a consumer’s credit score.
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