The Fair Isaac Corporation (FICO®) recently announced that they will launch the new FICO® Score 10 Suite in the summer of 2020. This update of the scoring model will include FICO® Score 10 and FICO® Score 10 T.
FICO® says that the new suite will have a stronger predictive power and will use more complete data than previous scoring models. This helps lenders make more accurate credit decisions.
For example, FICO® says that lenders can reduce defaults in their portfolio by 10 percent among newly originated bank cards and by 9 percent among loans for newly originated cars, compared to the use of FICO® Score 9.
For consumers, the new scoring model could affect scores and future credit and loan applications, depending on both your current scores and credit history. Read our guide below to learn about changes with FICO® Score 10 and how they could affect you.
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What are the new FICO® scores?
FICO® Score 10 and FICO® Score 10 T are two scores included in the new set of scores. We will briefly explain the differences between the two before immersing ourselves in the main changes that the new suite brings.
FICO® 10 Score
Specifically, for FICO® Score 10, many things have remained similar to make it easier for lenders to transition from older models. This means that the scoring model uses the same reason codes and scoring ranges consistent with previous models.
FICO® Score 10 does not use trend data like previous models to give lenders the flexibility to use the model they prefer to use.
FICO® 10 T score
FICO® Score 10 T, on the other hand, uses trend data (also known as time series data). The updated data will provide lenders with a historical view of a person's credit history for the past 24 months.
This is the first time that FICO® will use trend data in its scoring model. Previous models only gave lenders a small window to a person's credit history, but trend data allows lenders to see behaviors and patterns based on a longer snapshot of a user's credit history. For example, lenders can see if you tend to accumulate high balances on your credit card during the month, even if you never fall behind in payments.
What are the main changes?
The main changes with FICO® Score 10 Suite are that FICO® Score 10 T uses trend data, personal loans are treated differently than before, and high balances, revolving debt and late payments are analyzed with greater Attention.
In addition, the data for the entire suite is more complete than before and the algorithms have been updated to better predict the risk to the current consumer.
The use of trend data is the main source of the other important changes. Since lenders can take a historical look at the borrower's behavior, they can make more informed decisions.
The use of personal loans can lower your score if FICO® determines that you are using it irresponsibly.
FICO® Vice President of Scoring and Analysis, Joanne Gaskin, said in a NPR Interview that personal loans are now divided into their own category to assess whether they are used properly or not.
In the previous model, your score could have increased if you paid a large sum of debts with a personal loan. The new model will analyze its behavior over a longer period of time to see if it continued to keep its balances low or if it increased its revolving debt after paying off the loan. For borrowers who do the latter, they can see a possible drop in their credit score.
High balances, revolving debt and late payments
A high balance and a revolving debt will affect credit scores with this model more severely compared to the previous ones, since FICO® Score 10 T can track your debt over time. Both high balances and renewable debt affect your use of credit.
Late payments, also known as crime, will also have a more severe impact on a person's credit score. Payment history is the factor that most impacts your credit scores.
"It is likely that consumers with recent delinquency or high utilization will see a downward shift and, depending on the severity and timeliness of the delinquency, could be significant," Dave Shellenberger, vice president of product management at FICO®, he said in a statement.
Why does FICO® update its scoring model?
FICO® update your scoring model to reflect consumer trends and the needs of the lender. They update their scoring model every four or five years, but this fluctuates according to need and the types of changes needed.
These updates help lenders make more accurate decisions when evaluating credit applications. Changes can sometimes favor consumers if, as a result, they are scored more accurately.
For example, FICO® predicts that the new FICO® Score 10 T will allow credit card lenders to approve up to 6 percent more applicants while maintaining constant default rates, compared to the FICO® Score 8.
When will lenders adopt the FICO® Score 10 suite?
FICO® will launch FICO® Score 10 Suite this summer, but it may take some time before lenders adopt the new model. FICO® He says that most lenders still use FICO® Score 8, which was introduced in 2009.
Although FICO® is used by most lenders, some use other scoring models such as VantageScore. This is a newer rating model created by the three major credit agencies: Experian®, TransUnion® and Equifax®. Despite this, lenders may be tempted to use the most recent FICO® score due to their stronger predictive model.
"When we launch a stronger and more predictive model, we see that lenders will migrate to the stronger model because it allows them to make more loans to more consumers without risking more default risks," Shellenberger told Market clock.
How could the changes affect me?
Borrowers will see their credit score improve if they currently have a good credit score, but they will see a decrease if they are in a lower FICO® score range, around 580 or less, Gaskin said in that same NPR interview.
Around 110 million consumers will see a change of less than 20 points in their score under the new credit score model and approximately 80 million consumers will see a change in the score of 20 or more points in any direction, up or down below, FICO® said as reported by CNBC.
What should I do if I think my score will be negatively affected?
You can pay and keep balances low, start an emergency fund and avoid accumulating debts after using a personal loan if you believe the new scoring model will reach your score. See below how you can do these things to prepare.
- Pay any high balance: Decrease high balances as it has a more pronounced impact with the new scoring model.
- Pay balances more frequently to keep them low: The updated data may work against you if your balance is constantly high throughout the month. You can make smaller payments more frequently and decrease your expenses to keep utilization low.
- Start and maintain an emergency fund: Instead of resorting to credit cards or loans to cover an unexpected expense, an emergency fund is a great resource in a hurry that will not affect your credit score. Start by leaving aside what you can pay each month.
- Avoid creating high balances after paying off the debt with a personal loan: Since personal loans receive additional attention with this new model, be careful not to generate more debt after paying off with a loan. Explore other options before applying for a personal loan and create a budget that you can meet to avoid taking on more debt.
How can I maintain a good credit score during changes in the scoring model?
Although it is good to be aware of changes in the scoring model, it is better to continue participating in good credit habits to maintain a good score. Keeping your balances low and paying bills on time are things you should always do, since the factors that affect your credit score probably won't change.
You can look for options such as secured credit cards and loans to create credits if you have bad or non-existent credit. These are options that you can use to build or rebuild your credit if you have difficulty applying for unsecured credit cards or other types of loans.
Take a look at our tips for creating credit if you want to deepen your credit score and establish good habits to keep your credit and finances in good shape.