According to a recent article from Northwestern Mutual, your credit score is one of the most important numbers in your life, as it’s used to set the rates you get on loans. A good score can make a big difference for your money.
That’s why it’s worth taking notice that one of the most common credit scores — known as the FICO score — will be calculated differently starting this summer. Fair Isaac Corp., which produces the FICO score, estimates that about 110 million Americans will see a change of less than 20 points, and about 80 million people will see a change of 20 points or more.
HOW DOES THE FICO SCORE WORK?
FICO scores are used by most lenders when they make decisions about things like giving you a car loan, personal loan, a mortgage or even a new credit card. A good score can get you better rates while a bad score can result in you paying more or not getting a loan at all.
FICO scores are calculated from a range of 300 to 850. While it can vary from lender to lender, here’s how scores typically break down:
- Poor: 300 to low 500s
- Fair: Mid 500s to mid 600s
- Good: High 600s to low 700s
- Excellent: Mid 700s to 850
WHAT’S CHANGING?
The new FICO 10 score will take into account the same categories of credit data, including payment history and amounts owed. But unlike past models that typically looked at recent data, FICO’s new scoring will look over a two-year period, which is known as “trended data.” The goal is to provide more accurate insight to lenders about how you’re using your credit over time — rather than a monthly snapshot — so that lenders can better assess whether you will be able to pay back your loan.
The new score will also monitor the use of personal loans, which have become the fastest growing debt category. Many people use personal loans to consolidate debt. But with debt levels rising, the concern is that more and more people are using a personal loan to pay off a credit card and then running up debt on that card again.
WHO WILL BE AFFECTED?
In addition to the 110 million people who will see a modest change of less than 20 points in their credit score, FICO estimates that another 80 million Americans will see their credit score change by 20 or more points — about 40 million will see their scores drop, the other half will see them rise.
While the FICO credit score changes are expected to be implemented starting this July, not all lenders will switch to the new model right away. In fact, some lenders are still using models that are several generations behind the new one. So, needless to say, it may take some time before these changes actually affect you.
WHAT SHOULD YOU DO?
The good news is that while the FICO scoring model may be changing, the principles of how to achieve and maintain good credit remain the same: Paying your card balances on time, not taking on too much debt, keeping a low credit utilization ratio (i.e., using 30 percent or less of your credit) and limiting the amount of new credit you request will continue to go a long way in earning the best possible score. If you’re already working to maintain good credit, then you’re in good shape. If your credit could use a little TLC, this is a good time to start working to make some improvements.
Posted by PollyAnna Snyder on
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