FICO has announced changes to its credit scoring model in a move that could have serious repercussions for millions of Americans. As first reported by the The Wall Street Journal, the new FICO 10 system will start incorporating consumer debt levels into its system this year.
While the company estimates that 110 million consumers will see a change of less than 20 points to their score, it also admits that some 80 million stand to see a change of over 20 points due to the various changes. The big difference is that previous FICO models focused largely on month-to-month bank balances, whereas the new system will draw on overall debt levels from the last two years.
At first glance, it all seems fair and simple: those who fall behind on loan payments are likely to see their credit score drop, while those who pay on time could get a boost. But where it gets slightly less equitable is that consumers with lower credit scores (600 or under) stand to be penalized the most for missed payments, while those with stronger ratings will be rewarded for continuing to pay off their debt.
This means that staying on top on your debt is more important than ever if you want to maintain a good credit score, so now might be the time to consider if one of the best debt consolidation companies or best debt settlement companies can help you improve your financial situation. If you're not quite sure how the two forms of relief differ, check out our detailed guide to debt consolidation vs debt settlement.
What is the new Fico scoring system, and who will be affected by the changes?
If you're in debt, the new FICO scoring system isn't likely to do you any favors – though there are some mitigating factors you should know about. FICO 10 places a particular emphasis on consistently rising debt levels, so those who accumulate growing credit card balances over several months are likely to see their score drop. Conversely, if your spending history sees you rack up credit card debt during a shorter, specific period each year, and then pay it off quickly, your score should remain more stable.
The new rules are also likely to hit some borrowers, as FICO will start flagging those who take out personal loans, due to their risky nature. Be especially wary of securing a loan to cover your credit card debt, and then continuing to use the card: this kind of scenario stands to be penalized severely under the new FICO 10 rules.
Those looking to secure a mortgage should pay particular attention to the changes, too, as many of the best mortgage lenders draw exclusively on FICO scores when working with government-backed loan providers Fannie Mae and Freddie Mac. If you get stuck, you can check out our roundup of the best mortgages for bad credit.
However, it's important to note that many other lenders can decide whether or not they want to use the new FICO 10 model, use an older FICO system like 2014's FICO 9, or turn to a competitor like VantageScore.