What the New FICO Score Changes Mean For YouFebruary 12, 2020
By Caroline Farhat
Are you apartment hunting, trying to refinance your student loans or thinking of applying for a new credit card? If you ever needed the motivation to care about your credit score, this is it. Your FICO score is going to be an important factor when trying to do any of those things. Recently, Fair, Isaac, and Company, the company behind FICO, announced that changes will be made to how the score is calculated. Keep reading to find out about the changes and what they could mean for your FICO score.
What is a FICO score?
The FICO score is a scale used to determine a person’s creditworthiness or risk. The score is used by potential lenders, such as banks and credit card companies. A FICO score ranges from 300 to 850, with a score of 700 or higher being considered good. A score of 800 or higher is considered exceptional. The average FICO score in 2019 was 703.
A person with a higher score is regarded as being less risky to lend to than a person with a lower score. Your FICO score can determine whether lenders will lend to you, as well as the terms of the loan, such as your interest rate. The interest rate on credit cards, student loans, car loans, and mortgages are all affected by your credit score. A higher interest rate can sometimes cost you thousands of dollars more over the life of a loan. A FICO score may also be considered when applying to rent an apartment – for example, a low score may require you to pay a higher deposit.
A FICO score is determined by assessing the following, among other factors:
- A person’s payment history
- How much debt a person has compared to how much available credit they have
- The total amount of debt a person has or their debt-to-income ratio
- The length of credit history
Typically, if you maintain a debt-to-income ratio of 30% or less and make on-time payments to your credit cards and loans, you can work towards a high score. If you’re ready to start improving your credit score now, check out our good credit-building guide.
New FICO Score Changes
The new changes coming to FICO are known as FICO 10 and are set to go into effect in the summer of 2020. They include:
- With the new FICO score chenges, lenders will be able to look at payment history two years back as well as account balances. This will demonstrate to lenders whether you are an occasional credit user or someone who consistently maxes out credit and hardly makes payments back.
- It will be noted if a person is taking out personal loans, and this could potentially negatively impact a person’s credit score. Personal loans may be considered riskier since they are unsecured loans, unlike mortgages and auto loans where your asset is the collateral for the loan.
- Late payments and high credit card debt compared to a person’s overall credit will also more negatively affect a person’s score.
Based on the new FICO 10 model, it is estimated that 110 million consumers will not see a significant change to their score, if at all. It is also estimated that 40 million people may see an improvement to their score by more than 20 points, and 40 million others may see their score reduced by more than 20 points.
What it Means for You
It is unclear when this latest FICO 10 model will be utilized because it is up to the individual lenders to determine what model they use. Some lenders are still utilizing FICO 8, which was released in 2009. Therefore, these new FICO score changes may not mean much for you now but could be significant in the future.
These new FICO score changes could help your credit score if you have a credit card balance that is occasionally high but you pay off the full balance monthly. However, if you are one of the 40 million people whose credit score is negatively impacted by this change, this may cause you to receive higher interest rates when applying for loans. If this is the case there are options:
- Try finding a creditworthy cosigner for your loan.
- Try strategies to improve your score and apply after you have raised your score.
- Refinance if you already have a loan, but now have a higher score.
If you have student loans and the new FICO model increased your credit score, you may be eligible for a lower interest rate on your student loans through student loan refinancing, thereby potentially saving you thousands of dollars. Do your research to find the best student loan refinance companies with low-interest rates, flexible terms, no application fees, and great customer service. Also, be sure to compare the student loan refinance rates from different lenders to find the lowest student loan refinancing rates available. Student loan refinancing can be an easy process and can potentially replace your high-interest loan(s) with a lower interest rate.
Want to find out if student loan refinancing is financially right for you? Check out our student loan refinance calculator to see your potential savings. At ELFI, we have no application fees, no origination fees, and no prepayment penalty. When you apply for student loan refinancing, you receive a personal loan advisor to help answer any questions and guide you through the process of refinancing.*
If you have student loans and your FICO score dropped, continue to make on-time payments and try to not take on any more debt. Refinancing may still be an option since different lenders require different minimum scores. However, if you are unable to refinance now, refinancing may be a good option in the future once you have demonstrated consistent on-time payments.
FICO models may change, but the basic principle is the same: try to reduce any debt you have and make on-time payments.
Need additional help with raising your credit score? Check out these 5 habits for good credit score hygiene.
*Subject to credit approval. Terms and conditions apply.
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