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New FICO 10 Credit Scoring-- Don't Panic!

A high credit score is the golden ticket to financial goodies—new credit lines, the best credit card rewards, lower mortgage rates and more. But a new FICO scoring model could cause some overextended consumers to see a dip in their numbers.  A soon-to-be-released new model from Fair Isaac Corp., could penalize certain struggling consumers, such as those who have both personal loans and rising debt levels, according to the Wall Street Journal.

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FICO's new scoring model known as the 10 will treat late payments and debt more severly, but will also consider past information about your credit card balances and payment amounts.  The goal is to give lenders a more precise assessment of your credit risk.  FICO 10 T includes what they are calling trended data.  Trended data, sometimes called time-series data, is information on your credit reports showing how you've managed your accounts over the previous 24 months, creating a picture of your financial situation during that time.  This allows the credit scoring model to differentiate consumers who pay their credit card debt in full each month from those who carry over a balance from month to month. Consumers who pay their credit cards in full each month are generally considered lower credit risks than those who carry a balance from month to month.  It also shows whether you are reducing, maintaining or increasing your balances over time.   

With the FICO Score 10 Suite, the impact of late payments and credit card utilization is more pronounced than with prior FICO Scoring models. This means consumers who miss payments are likely to experience a more severe drop in their credit scores. The best way to avoid the impact of late payments is to make all your payments on time—no exceptions.  Credit card utilization is calculated by dividing your credit card balances by your credit limits. A good rule of thumb for credit utilization is 30% or below.  The lower that percentage, the better it is for all of your credit scores.  It's important to note that not all lenders will use this new model. Lenders choose which scoring model to implement in their credit evaluations. Though FICO is the most commonly used scoring model, there are others, including the VantageScore. And lenders using FICO are under no obligation to use the most recent one.  So, to mimize the impact of these new changes, make use to pay your bills on time and keep your credit card utilizations as low as possible.

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