Consumers who fall into debt and look to catch up by taking out personal loans will most likely see their credit scores drop under the new credit scoring model FICO is putting into place.
The good news is that some credit scores will rise as lenders will be able to reduce the number of credit defaults, according to a press release from Fair Isaac Corporation, the company whose credit score system most U.S. lenders use.
FICO Changes Credit Score Model for 2020
The changes are part of the FICO Score 10 Suite credit rating system, which the company says uses “trended data” from credit reporting agencies.
Trended data will allow lenders to take into account the past 24 months or more of a borrower’s credit history.
The changes will affect millions of consumers in different ways. If you’re wondering how they might affect you personally, here’s what you need to know.
Whose Credit Scores Will Likely Increase?
If you’re the type of consumer who swipes your credit card heavily during a specific time of the month or year — but pays it off quickly — you’re likely to see less of a credit score drop, according to the Wall Street Journal.
As always, paying bills on time and keeping low balances will only help raise your credit score.
Whose Credit Scores Will Likely Go Down?
The changes will largely hurt people who make late payments or have missed a payment altogether in recently.
Additionally, people who carry running credit card balances month to month and try to catch up by taking out personal loans — adding to their debt, are likely to be negatively impacted — the Journal reports.
Another factor will be your “credit utilization ratio,” which is the amount of credit you’re using divided by your total credit limit. It’s best to keep that number under 30%.
Clark’s Take on FICO’s New Credit Score Model
Money expert Clark Howard says the key to handling FICO’s new scoring changes is to be hands-on when it comes to your credit.
“If you don’t actively manage your credit and stay conscious of your ratios, your score could decline even if you’re paying on time every month, so it’s very important to manage, especially with the newest FICO scoring model that’s just being rolled out.”
Clark says there are two big things you have to do to keep a healthy credit score:
- Pay your bills on time: “A single late payment can impact you so severely,” he says.
- Watch your credit ratio: “The amount of debt you have vs. your limit is so key.”
For those of you looking for a new mortgage, car loan, personal loan or credit card, you’ve got some months before the changes take effect.
FICO says the new scoring model won’t be available to lenders until this summer. To be up to speed when these changes go into effect, take a look at the links below.