How Changes to FICO Are Likely to Impact You

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FICO has updated the way credit scores are computed. How will the changes impact your score?

Fair Isaac Corporation, the company that brings us the FICO® Score, recently announced that it is changing the way its credit scores are calculated. 

Your credit score can have an impact on a number of things, from renting an apartment to getting an auto loan. And although Fair Isaac comes out with new updates every five years or so, this one -- called FICO® Score 10 -- seems to have people on edge. 

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The FICO® Score 10 is expected to impact some 80 million Americans when it rolls out this summer. According to Fair Isaac, lenders adopting the new scoring system can reduce the number of credit card defaults in their portfolio by 10% and the defaults on new auto loans by 9%.

What's the big deal?

FICO® Scores run from 300 to 850, with 850 being the highest score possible. Anything over 800 is considered excellent. The higher your score, the more likely you are to qualify for the credit you need, and the better your chances of being offered a good interest rate.  

That three-digit number is essentially a way for lenders to assess your financial responsibility. And according to Fair Isaac, their scoring system informs 90% of all credit decisions made in the U.S.  

Any change to the computation of that score is bound to garner attention. And the new model does something FICO has never done before: It takes into account the way you've managed your money over the past two years.

As a result, an estimated 40 million Americans will see their credit score rise by as much as 20 points, while another 40 million will experience a drop. The remaining consumers will see little change.

How does FICO® Score 10 differ from FICO® Score 9?

The new calculation will pay special attention to personal loans, giving them more weight. FICO will calculate how wisely you've used the loan. For example, if you've used it to pay off high-interest credit card debt, it will likely reflect positively on your score. However, if you've continued to run up revolving balances and are now deeper in debt than you were to start with, your score will take a hit. 

Your FICO score will continue to be based on the five factors previously used: payment history, how much you owe, age of credit, your credit mix, and new credit accounts. In addition, the new FICO® Score 10 will include:

  • Trended data (how you've used credit over the past 24 months)  
  • A greater drop in your score when payments are delinquent 
  • A bigger hit to your score when a large percentage of credit is utilized

In other words, Fair Isaac wants to take a deeper dive into how you use money in order to get a better overall picture of your financial discipline.

Who is likely to be most affected?

Fair Isaac indicates that the new system will have the biggest impact on those with credit scores in the 600s. Those with credit scores in the lower 600s who struggle to get their payments in on time are likely to see a drop.

Those with good credit -- in the upper-600s -- who make their payments on time and are beginning to lower their debt levels will probably see an increase in their score. 

Ways to minimize the impact

Because Fair Isaac does not expect the new scoring system to go into effect until summer, you have time to make positive changes. Though creditors have the option of adopting the new model or continuing to use an older version, your safest bet is to assume FICO® Score 10  will be the credit score of choice and prepare for it. 

Here are a few things you can work on right away:

Pay up. When FICO® Score 10 takes effect, delinquent payments are going to have an even greater impact on your score. Do everything within your power to get late payments paid up. If you can't come up with the extra funds, consider a side hustle until you're up to date. Then, make it a point to make all payments on time. If it helps, set up automatic payments. 

Watch your balances. The FICO® Score 10 will also place a greater weight on credit utilization. Lenders want you to have credit but to use it judiciously. For example, let's say you have a credit card with a $10,000 limit. Owing $9,000 on that card will mean you have a credit utilization of 90%, which will ding your credit a lot more than owing $2,000. Ideally, you should keep your utilization below 30%, especially as it will now have a bigger impact.

Better yet, use a credit card with great rewards and pay it off in full each month. That way, you'll be rewarded for your spending while enhancing your credit -- and without paying any interest.

Pull your credit report. You are entitled to a free copy of your credit report every 12 months from each of the three credit reporting companies. You can order yours online at or by calling (877) 322-8228. You will be asked to supply your name, address, Social Security number, and date of birth. Once you have it in hand, look your credit report over carefully, and if you find mistakes, dispute them with the credit bureau(s). 

As mentioned, the new FICO® Score 10 will have minimal impact on the majority of Americans. However, if you're worried that your credit score may take a hit, use the next few months to mitigate the impact. If you manage your money responsibly, is possible to raise your credit score -- and it looks like the new system will reward this type of behavior even more.

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