Change is Coming

Several months ago we heard rumors about upcoming changes in consumer credit reporting calculations. Then COVID-19 swept across the globe and demanded our attention. While there is no end in sight to the pandemic, I’ve decided to focus this post on all things FICO because, frankly, I could use a break from coronavirus. Ready to dive in?

Fair warning - This is more than you ever wanted to know about FICO, but since we had a request, I am going to forge ahead. FICO is the Fair Isaac Corporation – one of the companies that evaluate historical repayment of debt based on one’s credit history. It’s not unusual for credit reporting agencies to alter their calculations. In fact, they tend to do so every five years – give or take. The models that most lenders are using today are either FICO Version 8 (released in 2009) or Version 9 (released in 2014). The nice thing about Version 9 is that this model helped to deaden the impact of one-time late payments while putting a spotlight on credit usage. This Version is also less sensitive to medical debts and paid collections than previous versions. One interesting note about Version 9 is that consumers can have non-traditional trades included in their report. This means you can get credit for paying rent and utilities on time!

Just as we were all getting the hang of Version 9, Version 10 / 10 T comes along.

FICO 10 / 10 T Overview

• More emphasis on credit usage

• Weighs delinquent payments more heavily (especially delinquencies over the last 24 months)

• Flags personal loans as “higher risk” products

• Considered to be more accurate by providing lenders a more complete picture of the consumer’s credit history

• Little impact to an Authorized Signer’s credit

Photo courtesy of FICO

The takeaway is that for consumers who already had excellent credit, you may or may not see any impact on your score after the new reporting method is adopted by lenders. If you have a credit score that could use a little help, you might see the score drop. FICO has announced that borrowers, in general, will see approximately a 20 point swing – something that could be detrimental.

A lower credit score means paying more interest for loans, possibly paying higher premiums for insurance, mortgages/rent, and utilities. If you want to learn more about how credit scores affect virtually every aspect of your adult life, you can read my post.

What can you do?

The new reporting calculations are already in effect, but you can still do something to improve your credit score.

1.       Check your credit report – you get a FREE credit report from each bureau every 12 months. There might not be a score on it, but you can find out what the lenders see and address any issues.

Bonus Tip: Stagger your credit reports throughout the year (ie: request them in January, May, and September) so you stay on top of what’s being reported. This makes it easy to spot fraudulent activity and issues on your credit.

2.       Most lenders will provide a credit score based on a “soft pull.” This will not affect your credit score, but it does give you (and the lenders) a good ball park estimate of your score.

3.       Pay down your revolving debt. If you can’t pay the balance in full, you can still curtail your spending (usage of debt). Maxed out credit cards will drag your score down, so do your best to pay above the monthly minimum payment if possible. You want your credit usage to remain 30% or less.

4.       Try to avoid late payments. If you are in an emergency, contact your lenders immediately to work out payment arrangements.

Looking for a silver lining? Even though the new model is up and running, many lenders will not convert to it for a while. This means time is on your side to address any hiccups on your credit report.

I want to hear from you. Please leave me a comment below or send me an email. You can also submit your questions for future Blogs. If I use your idea, I will deposit $50 into your account.

Krista Kyte is a personal finance blogger and personal banker with over 17 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.