A change has been announced as to how credit scores will be calculated with the new FICO 10 system. According to CNBC, this new change to the FICO scoring system will put more weight on missed payments and rising debt levels.
What Does the FICO Change Mean for me?
The new FICO scoring system is going to better evaluate the current debt situation and it is anticipated that the gap between those with “good” and “bad” credit is going to widen. With more weight being given to missed payments it will become important to stay current on your debts and not send payments late.
According to industry experts featured on CNBC, FICO is expecting that this change to the system will result in a 9%-17% decline in loan defaults. According to 100 million consumers could see their credit scores change under new FICO scoring, individuals can expect the adjustment to their credit scores to be fairly significant.
FICO estimates that about 110 million consumers will see a change of less than 20 points to their score under the new credit score model. Overall, roughly 80 million consumers will see a change in score of 20 or more points in either direction, upward or downward, FICO says.
One major difference with this new scoring system is that they will actually dig a little deeper into debts. For example, in the current FICO system, a person with $5,000 in credit card debt would have their debt viewed the same as another person with $5,000 credit card debt. With the new system it will take into consideration if that $5,000 of debt actually shows progress of debts being successfully paid down or if it’s new debt when there wasn’t debt previously. The person who is showing the ability to pay down the debt will be viewed more favorably than someone who has actually increased their debt up to $5,000.
Debt Best Practices
These changes to the FICO score system are nothing to panic about. In fact the most used FICO system is still FICO 8 which was rolled out in 2009. FICO 9 was rolled out in 2014 and that is still being used as well. In fact, it may be some time before FICO 10 is more widely utilized.
Ultimately there are some good practices that you should always keep in mind for a healthy credit score and this does not change with the new system.
- Consistently make on-time payments. Making sure you pay your bills on-time has always been important but with this new FICO system it will be more important than ever.
- Keep your debts low. Increasing debts and not showing a history of paying them down will start to impact your credit score. Stay mindful about applying for additional debt.
- Don’t apply for too much credit at once. This is always a good practice. When buying a home your lender will ask you not to go open a new credit card or apply for a new car loan. It’s best to focus on applying for the new debt you really need and hold off on making too many moves at once.
Title Mortgage Solution is a leading mortgage banker and broker located in the heart of the Upper Valley. Our loan officers can help you understand your credit score and why it matters in the home buying process. If you plan on buying a home in 2020 we’d love to help you make the process as simple and straightforward as possible. Contact our team today!