Fair Issac Corp. – the company behind the FICO score, announced that they are launching a new credit scoring model this summer.
They estimated that 110 million Americans will see an immediate change in their credit score because of this new model called FICO 10.
While it is anticipated that some individuals will see their scores increase, scores will plummet around 20 points for about 40 million people – according to Fair Isaac reps.
There’s two new features this model will include in weighing our credit scores – consumer account balances and missed payments over the last two years.
The new model will take into account missed payments or delinquencies, and especially those made over the last two years, more significantly than in previous models. Borrows with late payments on their records will be at a greater disadvantage.
Also, borrowers with a history of high utilization ratios (the amount of credit you use vs. what you have available) will be penalized.
Since personal loans are generally seen as riskier than other financial products, consumers will be flagged for these.
Vice president of Credit Karma, Dana Marineau, summarizes it this way, “The new model now incorporates consumers’ debt levels, taking into account account balances for the previous 24-plus months, while prior FICO scores have focused on more recent account balances. Consumers who fall or have fallen behind on paying their debts, as well as those with high credit utilization ratios in the past two years, will likely see a decrease in their score,” according to a forbes.com article.
Borrowers who currently have good credit will benefit from the new model with a boost in their scores. These people could see savings on loans and mortgages, and even additional savings on interest and fees, according to president and CEO of United Wholesale Mortgage, Mat Ishbia.
While the FICO 10 model of credit scoring may benefit some borrowers, lenders are the real winners here. The new model should significantly reduce defaults – especially for lenders who issue mortgages. In fact, Fair Isaac believes credit card companies could lower defaults by as much as 10% and auto lenders could reduce defaults by an average of 9% with FICO 10.
Fair Isaac then reports that mortgage lenders could see a default reduction on newly originated mortgages of about 17%, when compared with the current version used by the industry. Still, one capital markets data scientist, Rylie Hendren, suggests that we’ll probably have significant public notice by Fannie and Freddie before FICO 10 is adopted.
Homebuyers and borrowers, in general, should take steps to avoid late payments. Other tips to maintain good credit with FICO 10 include:
Lower your spending.
Try to avoid using as much credit if you cannot make payments early, and switch to a debit card or cash for purchases.
Make your mortgage payments.
You will want to stay on top of every mortgage payment because your mortgage history will have a more significant impact on your FICO score than previously.
Pay credit card balances early – before they’re due each month.
“One tricky point about credit card utilization rates is that your usage depends on the balance that your card’s issuer reports to the credit bureaus, not how much you spend each month. Those two numbers aren’t always the same. What this could mean is that your issuer may report your billing cycle’s balance before you pay it off.” – Marineau
Check your credit report periodically.
You should know where you stand and what’s happening with your credit by checking your report from time to time.
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