FICO announced its new FICO Score 10 Suite of scoring models Thursday, promising more accurate credit risk assessments and significantly reduced defaults. It may also have an impact on your ability to qualify for loans.
The biggest change is in the use of trended data to help lenders get a more accurate picture of your ability as a consumer to take on credit.
They could lead to more offers and better rates if you can prove your history of good credit use, whether you’re applying for a credit card, auto loan or mortgage.
“2019 was a cautious year in the credit card industry, and 2020 is starting the same way,” says Ted Rossman, industry analyst at Bankrate. “Even though recession worries have waned in recent months, card issuers are concerned that the economic expansion can’t last forever, and they don’t want to overextend themselves. We’re seeing some pullbacks on approvals and credit limits, along with less generous sign-up bonuses. Lenders will be drawn to the much lower default rates the FICO 10 Suite is promising.”
“Many lenders want to leverage the most comprehensive data possible to make precise lending decisions,” Jim Wehmann, executive vice president for Scores at FICO, said in a press release. “By offering a score that taps further into trended data, we’re able to give lenders greater flexibility and predictive power, as well as ease of integration.”
Traditionally, many lenders have relied on a static credit score — sort of a snapshot — when they measure a consumer’s creditworthiness. Trended data, on the other hand, paints a fuller picture over a longer period of time.
According to FICO, the new FICO Score Suite will be available through credit reporting agencies beginning this summer and scores tailored for specific industries will also be available.
The new FICO Suite is designed to help lenders better assess credit risk and prevent consumers from taking on loans or credit cards that may not align with their creditworthiness.
FICO Score 10 is similar to FICO’s current model, FICO 9. FICO 10 will make integration easiest for lenders looking to convert to the new Suite. FICO Score 10T, on the other hand, takes trended data from the credit bureaus into account. That means your history of credit use, like your account balances for the past year, will be considered in your credit score.
“FICO 10T will incorporate trended data, which basically means that they’re going to try to smooth out the peaks and valleys,” Rossman says. “A temporary spending spike such as a vacation or holiday shopping won’t hurt your credit score as much if you generally keep your credit utilization low.”
The other side of using trended data, though, is that if you fall behind on payments or begin to accumulate more debt, your score could be impacted negatively.
Unlike current models that generally account for the most recent month’s data alone, lenders using FICO 10T will gain a bigger picture view of your relationship with credit and historical ability to make payments.
The new model is also in contrast with recent products like UltraFICO and Experian Boost, which are designed to help consumers quickly boost their credit scores and qualify for more loans by incorporating nontraditional information like utility payments and banking history.
“Ultimately, though, change comes slowly in credit monitoring,” Rossman says. “The most-used formula is still FICO 8, which came out in 2009. Rather than getting too hung up on which model a particular lender is using, consumers should practice fundamental good habits such as paying their bills on time and keeping their debts low.”
How you can improve your credit score
As consumer debt levels rise higher than ever before, it’s more important than ever to begin working toward a great credit score. Even if your credit hasn’t always been perfect, improvement will work in your favor. Begin building sustainable, good credit habits that can help you improve your score now.
“Credit scores are extremely important because they help determine whether or not you get approved for a loan or line of credit, and if you do, what interest rate you will be charged,” Rossman says. “They’re among the most important numbers in your financial life. And while credit scores have been rising overall, FICO says almost half of U.S. adults either have low scores or no score whatsoever. There’s still a lot of room for improvement.”
If you already have loans or lines of credit, make sure you complete your payments on time and in full each month. Keep your credit utilization, or the ratio of credit you’re using relative to the amount you have available, low; below 30 percent is good but around 10 percent is optimal. Diversify your credit with different types of loans but don’t apply for too many lines of credit within a short time period.
According to Rossman, for many it’s difficult to even access credit to begin building it. “It has gotten harder to establish a solid credit history in your late teens, early 20s and even beyond,” he says. “Fifty-eight percent of millennials have been denied at least one financial product due to their credit score, compared with 35 percent of older adults.”
Look into taking on a secured credit card or one targeted toward those with bad credit or no credit history. You can even consider asking a trusted friend or family member to make you an authorized user on one of their accounts and pay them back for your spending.
- ^ FICO Score 10 Suite (fico.gcs-web.com)
- ^ UltraFICO (www.bankrate.com)
- ^ Experian Boost (www.bankrate.com)
- ^ consumer debt levels (www.newyorkfed.org)
- ^ sustainable, good credit habits (www.bankrate.com)
- ^ don’t apply for too many (www.bankrate.com)
- ^ denied at least one financial product (www.bankrate.com)
- ^ secured credit card (www.bankrate.com)
- ^ bad credit (www.bankrate.com)
- ^ no credit history (www.bankrate.com)
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