On January 23, 2020, FICO, one of the most widely used credit scoring services among lenders, announced the latest release of their scoring model, the FICO Score 10 Suite. As with previous updates, this new version will show more precision and reduce the number of possible defaults in lending portfolios. Of course, practicing good fundamental credit habits should be one’s main priority, but it is also never harmful to understand how updates to the way FICO scores are calculated may affect you.
Why Does Your FICO Score Even Matter?
Your FICO score is one type of credit score that uses data and predictive analysis to assess credit risk. Although the FICO scoring model is not the only scoring model used to determine credit scores, it is one of the most common as “90% of top lenders use FICO scores when making lending decisions.” Possible FICO scores range between 300 and 850; generally, people with scores above 650 will have better luck borrowing while those with scores below 620 may have more difficulty and face higher premiums. Understanding how your score is calculated and what other factors can affect it is a good credit habit which will give you better chances of getting better rates and more advantageous terms on future loans or credit cards.
What’s the Reason for the Change?
In past FICO scoring model updates, the changes have typically been beneficial for consumers, such as removing civil judgments from credit reports which would negatively impact the consumer, or including bank account balances and utilities payments to make it easier for consumers to be approved for loans.
As a result of these changes, the average FICO score has been rising with the average FICO score even hitting an all time high of 706 in 2019. However despite this total household debt in the USA has still been rising and has registered as more than $13 trillion.
Now it seems that with the new FICO 10 update, FICO has changed gears compared to past updates. Rather than consumers’ interests, lenders are perhaps the driving force behind this update as the scoring model will utilize more comprehensive data and more precise lending decisions to offer lenders “greater flexibility and predictive power.” This better predictive power will be advantageous to lenders who will be able to clearly determine good risks and those that are not, but could conversely be disadvantageous to people who are leaning more towards the 25th percentile of the scoring scale.
So What Will FICO 10 Suite Change?
The new FICO 10 and 10T Suite will be able to better track personal loans and account for one’s debt levels. In order to accomplish this, FICO 10 Suite will make use of trended data as well as monthly account balances over about a two-year period in making scoring decisions.
Incorporating this historical data will improve predictions of consumer behavior, which means about 80 million people could see 20 point shifts—up or down—in their credit scores, according to the San Francisco Chronicle, CNN, and USA Today. Your own credit habits will determine whether that shift could be an increase or a decrease.
|Those who:||while those who:|
|– Pay bills on time|
– Don’t carry high credit balances
– Pay cards off monthly
|– Have high credit card debt compared to overall credit|
– Recently missed payments
– Consistently keep a balance
– Have recently signed up for personal loans deemed risky
|…will see improvements in their score||…will see decreases in their credit score.|
If you are already practicing good credit habits, then congratulations, as the updated scoring model should really be of no worry to you! However, if you wind up in the group of people who will see credit score decreases as a result of the update, then you should know that it’s never too late to start practicing good credit habits and that over time, doing so will have a far more drastic effect on your credit score than any updated scoring model.
Super well-written! I think it’s great that you showed how the FICO calculation update is going to affect different borrowers. Interesting to see the role large banks play in how these credit scores are determined and the extent to which Fair Isaac Corp. is independent from its customers.