Will the New FICO Credit Scoring Model Help or Hurt You?

Young couple on the couch and shocked by credit score

The following is presented for informational purposes only and is not intended as credit repair or credit repair advice.

Just when you finally think you’ve got this credit thing all sorted out, here comes FICO with another updated scoring model. And as with all new scoring models, it could be a very good thing for you…or a very bad thing. Here’s what you need to know about the new FICO Score 10.

Reminder: You Have Multiple Credit Scores

First things first, whenever we’re talking about a new credit scoring model it’s important to point out that there are quite a few different scoring models out there. FICO is the most recognizable name in the game, but even FICO offers more than one scoring model.

So when we say, “These changes will impact your credit score,” what we’re really saying is that these changes will impact one of your credit scores. And that only really matters if a lender or other party is using that particular scoring model.

Why Do Credit Scoring Models Keep Getting Updated?

When new credit scoring models are rolled out, they’re usually designed to better predict the behavior of individual consumers and borrowers. Certain factors are emphasized, others are de-emphasized or phased out altogether. New models strive to do a better job using the available data to help make good decisions. For the many competitive markets where consumer credit scores matter, the more precise a credit scoring model, the better.

You may not be personally impacted by the FICO Score 10 right away because the lenders you interact with may not be using the FICO Score 10. It’s still very important to pay attention to these changes, however, because they likely represent trends that will eventually make their way into other scoring models.

What Changes with FICO Score 10?

The major upgrade for FICO Score 10 is the use of trended data. Historically, credit scores have been based off of a snapshot of your current credit report. Today’s credit balances and today’s credit utilization ratios helped form the basis of most scores. FICO Score 10 more carefully examines a consumer’s recent history and the trends that have developed over time to predict their creditworthiness.

The aim of the new model is to better identify risky behavior and adjust scores accordingly.

How Your Score Could Change

If the new scoring model works as intended, normal, traditionally healthy credit usage will continue to help build a strong score. You may also find yourself significantly less penalized for negative marks that don’t fit the pattern of your recent usage.

For example, a sudden spike in debt – whether from holiday shopping or an unexpected medical bill – should hurt your credit significantly less than it may have in past models, especially if your overall trends are positive. This new scoring model should do a better job of rewarding you for consistently positive credit behavior over time, even when things take a momentary dip.

On the flip side, however, certain risky credit behaviors that haven’t been factored into previous scoring models could cause your score to drop. One potentially significant factor is a rising debt load. If your debt levels are trending up – even if your credit utilization ratio is still looking okay – you may be seen as risky and your score could drop.

Similarly, if you consolidated your debts with a consolidation loan and then began accruing new credit card debt, that may likely be viewed as risky behavior and your score could be penalized as a result.

The Keys to Good Credit Haven’t Changed

While the FICO Score 10 model may provide lenders with a little more precision and a helpful edge in decision-making, it doesn’t change any of the fundamental keys for building strong credit. In fact, if anything, this new model just reinforces what most credit experts have been saying for years: if you make your payments on time and don’t overextend yourself, you’re on the right path to strong credit.

Tagged in Build your credit score, Understanding your credit report

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

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