What Changes Are Coming to FICO Credit Scores?

Your credit score is the key to your financial well-being. It’s the number that determines whether or not you’re eligible for new loans, a mortgage, new credit cards, or even special low interest rates. And for the first time in years, a big change is coming to your credit score.

In January 2020, FICO announced that the way credit scores are calculated is changing. Soon, your FICO credit score will no longer look the same. And a shocking 110 million Americans will see their credit scores shift. But what does this mean for your financial future?

This huge FICO credit score change is shocking. But fortunately, you have time to prepare for it. If you’re worried about what might happen to your credit score, you just need to know how these changes will affect you.

The New FICO Score Will Look at More of Your Data

The big changes that FICO announced in January are significant. But they aren’t unexpected.

FICO actually changes its scoring model every five years. So, in 2020, it’s time for another regular update for all FICO scores. And now, FICO will try to better predict lenders’ risks by looking at more data from your credit history.

Here’s what will happen. For the first time, FICO will offer two different versions of your credit score: the FICO 10 and FICO 10T. 

The FICO 10 is the credit score you’re already familiar with. The FICO 10T, however, is where the change is happening. The “T” in 10T stands for trended data. And that means that your FICO 10T score will look at trended data – or up to 30 months of your credit activity.

Essentially, the new FICO 10T score will show lenders a little more insight into your financial behavior. This is something lenders are interested in, as it offers better information about how you repay debts and manage your credit over a longer period of time.

You Could See Your Credit Score Drop Significantly

Most people are worried about the new FICO 10T score because it could significantly change their credit score. And there is a bit of a reason to be concerned. Approximately 40 million Americans will see their credit score decrease by 20 points or more.

The new FICO credit score will look at your credit history in different ways. Certain behaviors will now carry more weight. For example, delinquencies will carry a heavier penalty for your score. A high utilization ratio – the amount of credit you have available versus the amount you’ve used – will also be more important. And taking out personal loans will have a negative effect on your score.

Your score is most likely to see a decrease if you have consistently high credit card balances. If you aren’t paying down your credit cards each month and continue to grow your balance, you should expect to see your new credit score take a hit.

However, this change could also bring good news for borrowers. Many people actually won’t see much of a change – your score might shift up or down by just a few points. And some people will actually see an increase in their credit score.

So, as long as you know how the new FICO score will be determined, you can take steps right now to prepare for the change. And that can put you on good financial footing for the future.

Prepare for Your New Score Right Now

The FICO 10T is expected to appear in the summer of 2020. However, lenders and financial institutions likely won’t begin using this new scoring model right away – it’ll take about a year before it’s widely used.

That means you have time to work on your credit score before the change happens. And doing this could help you avoid a dramatic decrease when the FICO 10T becomes available.

If you’re worried about your credit score, you can take these steps to work towards improvements under the new FICO model:

  • Pay down your credit card. Consistently high credit card balances will suggest you’re struggling to repay your debts.
  • Make smaller, more frequent payments. If you have debt to pay down, paying smaller amounts more often can help reduce the overall balance, even with high interest.
  • Pay your bills on time. On-time payments are one of the most important factors in any credit score.
  • Limit your credit applications. Applying for a lot of loans or credit cards can cause your credit score to drop.
  • Keep old accounts open. Don’t close out an account that you’ve consistently paid on time, mostly paid off, or has available credit you aren’t using. These accounts can make your score better.

Ultimately, the new FICO 10T credit score may change your credit score. But if you know how the new credit scoring model will affect you, you can prepare for it right now. Take steps to get your finances in order today, and you can be in a great place when the change happens.

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