Changes to the FICO Score in 2020 - What You Should Know

Feb 18, 2020 3:00:00 AM tax season




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One of the best ways to keep track of your financial health is to monitor your credit score. This number helps to determine your eligibility for different kinds of loans (personal, mortgage, auto, etc.), rentals, credit cards, and more. We’ll get right down to what you need to know about the changes to your score this year, but it is essential that you also take the time to understand why your FICO score is so important.

Independent of any other factors, FICO is getting ready to make changes that may drastically alter credit scores going forward. The new scoring model, which will be released in the summer of 2020, will place a greater focus on personal loans since it is often considered in lending decisions. FICO’s Vice President of Scores and Analytics also stated that it could change millions of credit scores by up to 20 points in either direction. But how will this affect you, personally?

Changes to the FICO Score in 2020 – What You Should Know

1. Personal loans will become their own distinct category


The new version of the FICO credit score will place a higher emphasis on debt trends, so it’ll most heavily impact individuals with high levels of debt and credit card usage. It will also enforce a harsher judgment for late payments and includes a wider scope (up to two years) to determine how responsible borrowers are by evaluating the types, lengths, and amounts of their debts.

Of the different debt categories available to consumers, personal loans are the financial items that are growing in popularity faster than all others. Many individuals choose to enlist the help of a personal loan so that they can pay off higher interest credit cards, which may have previously boosted their score and reassured lenders that they make wise financial decisions. Now, the widened scope under the new rules will show lenders whether borrowers employed this tactic once to dig themselves out of a hole or if it’s part of a larger pattern of credit card abuse. 

For individuals that often make on-time payments and keep their credit card usage low, the new rules may lead to an increase in the credit score instead. According to credit giant, Experian, the five main factors that have been used in the previous FICO scoring models will remain the same, but to put it simply, FICO 10 will more strongly penalize debt and late payments, offer lenders more information, consider trended data as a metric, and emphasize personal loans.

2. It won’t affect everyone or every loan

This new scoring model is called FICO 10, and it won’t be the only version that lenders rely on. Since some lenders (particularly mortgage lenders) may continue to use older versions of the credit score, it may not impact your ability to secure a loan at all. That doesn’t mean that your score won’t still change, just that it may not be enough to make a difference in how you handle your finances moving forward. The impact of the score changes will depend on the version of the FICO model used by the lender, the stability of your other credit factors, and your personal debt trends.

3. You can make other smart money moves to bring your score back up

The people who are most likely to be negatively impacted by the changes are individuals with credit scores around 600 and below, potentially making it even more difficult for low-income individuals. 

Improve Your Credit Score Before FICO 10 is Launched 

Before you accept a loan with a high interest rate or make other financial decisions, consider making some other money moves to bring your score up first:

  • Review your current score for discrepancies before FICO 10 is released in the summer
  • Make all of your payments on time
  • Keep old credit cards open to lengthen your credit history (unless it has an annual fee or you’ll be tempted to overuse it if it remains open)
  • Use less than one-third of your total credit card limit
  • Pay off credit card balances each month (if possible)
  • Apply for credit sparingly

 

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