- Released in the summer of 2020, the FICO 10 credit score model changes the credit scoring algorithm, helping consumers with good credit, and hurting those with marginal credit.
- For the first time, FICO integrated trend data as part of the score calculation.
- The changes also include the treatment of personal loans and increased emphasis on high revolving debt balances and recent late payments.
In 2015, the three major credit bureaus settled a lawsuit, agreeing to adjust credit reporting practices. By April 2018, credit bureaus no longer included judgments or tax liens on consumer credit files. In addition to this change, the FICO 9 scoring model no longer considered paid off or settled accounts and changed medical debt treatment.
These adjustments helped raise the average consumer score and benefited those with past financial hardships. However, lenders complained about an inaccurate assessment of risk due to the elimination of paid off accounts and ceasing to report information found in public records.
Today mortgage lenders are one of the few that require a review of your public record to identify tax liens and judgments.
FICO typically adjusts its scoring models about every five years. In the summer of 2020, FICO released its newest model, the FICO 10. Below are changes that could affect your credit score:
Treatment of Late Payments and High Credit Utilization
FICO 10 places increased emphasis on payment history and the balance-to-credit line ratio, otherwise known as the utilization ratio. While any negative activity, such as a missed payment, remains on your credit file for seven years, the FICO 10 credit score model increases the impact of missed payments and high revolving credit balances.
Impact of Data Trends on Your Credit Score
Previous FICO scoring models took a snapshot of a credit profile and calculated the score based on the information from a single point in time. The new model reviews credit use over a two-year timeframe and adds it to the calculation.
Trend data will include revolving balances, minimum payment requirements, and the amount paid toward balances due. Using multiple data points can distinguish consumers who pay off accounts each month and those who carry a revolving debt.
Using a series of data points should reduce the impact of a single event. For instance, if you typically pay off credit cards each month, charging a large amount for a vacation and then paying it off over 90 or 120 days will not impact your credit score as much as previous scoring algorithms. However, balances that trend upward or a series of late payments will have a greater influence on the overall score.
Treatment of Personal Loans
One of the most common ways consumers tackle credit card debt is with a personal consolidation loan.
Previous versions of the FICO score treated personal loans like any other loan. FICO 10 considers personal loans separately, much like FICO 9 gave special consideration to delinquent or paid off medical debt. The new algorithm will penalize consumers who consolidate debt with a personal loan to pay off credit cards and then run up the balances again on credit cards.
How These Changes Impact Your Credit Score
Consumers who already have good credit will likely benefit from the changes. FICO estimates 40 million consumers will see an increase in their credit score of 20 points or more.
It will also create a bigger gap in scores, with another 40 million consumers seeing scores fall by 20 points or more. If you are currently struggling to manage high debt loads, you will likely see your score decline, which could complicate your ability to obtain a consolidation loan or transfer balances.
The additional weight placed on high credit card balances and the use of trend data will hurt consumers who deal with financial hardships by relying on existing credit lines to get through the crisis.
Debt settlement could become your best option If you have difficulty paying unsecured debts. With a demonstrated hardship, like the loss of a job, reduced hours or furlough, debt settlement makes it possible to pay less than the full balance to get out of debt faster by negotiating with creditors to lower the payoff needed to get out of debt.
When did FICO change its scoring model?
The latest scoring model, FICO 10, launched in the summer of 2020. The changes made in the new model lower credit scores for over 40 million consumers.
Why do I have more than one FICO credit score?
FICO introduces new scoring models every few years, creating multiple scores for every consumer. Each credit bureau could contain different information, also resulting in different scores. Lenders can choose to use any score available and are often slow to adopt the most recent changes.
What are the key changes to the latest credit scoring model?
FICO 10 puts more emphasis on late payments and high levels of revolving debt and now uses historical trends to calculate your score.