FICO 10 Score: What You Need To Know About The New Credit Score (Video)
FICO, the company behind the creation of the original FICO credit score and its many subsequent iterations, has announced the latest model in their line of credit scoring algorithms: the FICO Score 10 and the FICO Score 10 T. The “T” in the latter scoring model stands for “trended,” which reflects the incorporation of trended data over time into the algorithm.
Thanks to not only the trended data but also a few other major changes, the new scoring models are claimed to be superior to all previous FICO scores.
Although the majority of consumers are not likely to see a dramatic change in their credit scores, some groups of consumers may experience more extreme shifts. Ultimately, the new FICO scores are predicted to widen the gap between consumers with good credit versus those with bad credit.
However, none of that matters until FICO 10 and 10 T actually start being used, which could still be a few years away.
Keep reading to get all the facts on FICO 10, including what makes it different from previous FICO score versions, the impact it will have on credit scores, and when we will start to see lenders adopting it. Most importantly, we’ll tell you how to get a good credit score with FICO 10.
Why Did FICO Come Out with a New Credit Scoring Model?
The whole point of a credit score is to communicate a consumer’s level of credit risk to lenders so that lenders can make less risky decisions when granting credit. Lenders want to avoid extending credit to borrowers who are likely to default on a loan because defaults represent losses for the company.
So, the more accurate a credit scoring model is at predicting consumer credit risk, the more useful it is to lenders. With a predictive credit scoring model, lenders can make more informed lending decisions, which helps their bottom line.
For this reason, the goal of each new credit score is to make it better than the last version at predicting credit risk, and that is exactly what FICO 10 is designed to do.
Consumer Debt Is on the Rise—But So Are Credit Scores
According to The Balance, consumer debt has increased to record levels, and yet the average credit score in the United States has also increased to 706 as of September 2019. This can be attributed partly to economic conditions over time, but there is another major factor that has the banks worried.
FICO 10: More Accurate Predictions of Credit Risk
FICO predicts that FICO 10 will lower defaults on auto loans by 9% and defaults on mortgages by 17%.
Due to the changes made to the scoring model that we discussed above, especially the inclusion of trended data for the FICO score 10 T, FICO claims that the new scores perform better than all previous FICO scores by substantially lowering consumer default rates.
Here’s what else FICO has to say about their new products:
“By adopting the FICO® Score 10 Suite, a lender could reduce the number of defaults in their portfolio by as much as ten percent among newly originated bankcards and nine percent among newly originated auto loans, compared to using FICO® Score 9. The reduction in defaults is even higher for newly originated mortgage loans, at 17 percent compared to the version of the FICO Score used in that industry. These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers.”
How Is FICO 10 Different Than Previous FICO Scores?
Although FICO routinely updates their credit scoring algorithms every five years or so, this will be the first time that they are releasing two different versions of the same general scoring model: FICO 10 T, which uses trended data; and FICO 10, which does not use trended data.
Both FICO 10 and FICO 10 T will be drastically different than the previous FICO score, FICO 9. FICO 9 was designed to be very forgiving to consumers, which led many to believe that it produced credit scores that were higher than they should have been.
With FICO 9, for example, medical collections were given less weight than other types of collections, which was a benefit to consumers struggling with medical debt.
Furthermore, FICO 9 completely ignored paid collection accounts, meaning that if you had a collection on your credit report but then paid the balance, it would no longer affect your credit score. Many felt that this change contributed to FICO 9. On the other hand, if you have been managing your credit well and your debt levels have been decreasing over the past two years, you will be rewarded for that behavior.
Personal loans from online lenders have exploded in popularity, but it’s best to avoid them if you want to get a high FICO 10 credit score.
Personal Loans Will Be Penalized
The vice president of scores and analytics at FICO, Joanne Gaskin, has said that the most significant change to the scoring algorithm is the way it treats personal loans.
Personal loans are growing faster than any other type of consumer debt, even credit cards. Consumers are turning to personal loans to consolidate credit card debt more frequently than in the past, and the proliferation of financial technology companies has made personal loans easier to qualify for and more accessible.
With older FICO models, personal loans are treated the same as any other installment loan. Since the balances of installment accounts don’t affect credit scores as much as the utilization ratios of your revolving accounts, with most scoring models, taking out a personal loan to consolidate credit card debt (essentially converting revolving debt into installment debt) would benefit a consumer’s credit score.
However, many consumers who take out personal loans to pay off revolving debt don’t change the spending habits that got them into debt in the first place. Consequently, after getting a personal loan and paying down their credit cards, they may run up their cards again and find themselves even deeper in debt.
According to FICO, the credit risk of such consumers is higher than you would think based on their credit scores using previous FICO models. To account for this, FICO 10 is treating personal loans as their own category of credit accounts and is potentially penalizing consumers for taking out personal loans; 40 million consumers are likely to experience a credit score drop of 20 or more points with FICO 10 compared to previous models. This could push some consumers over the edge into a lower credit rating category.
FICO has estimated that approximately 100 million consumers will probably experience minor changes of less than 20 points to their scores. The company also estimates that about 40 million consumers will see their credit scores drop by 20 or more points, while another 40 million could see their scores increase by the same amount.
You are likely to see a credit score drop if you took out a personal loan to consolidate debt but then kept accruing more debt instead of paying it off, or if you have credit card debt that you are not paying down.
You are most likely to see a credit score increase if you have been penalized for having high balances from time to time, since the temporal data from FICO 10 T will help to average out the peaks in your utilization rate.
While a decrease of 20 points in your credit score isn’t catastrophic, it could be enough to make a difference in your chances of being approved for credit or the interest rates you could qualify for. This is especially true for those whose credit scores sit near the lower border of a credit score category.
For example, if someone with a credit score of 595 with FICO 8 is considered to have fair credit. If FICO 10 gave them a credit score that is 20 points lower, their credit score would be 575, which is considered bad credit. That could very well make or break your chances of getting approved for a loan or a credit card.
On the other hand, the inverse is true for those who stand to gain 20 points. If a 20 point increase pushes a consumer over the edge from fair credit to good credit, for example, this could certainly be beneficial when applying for credit.
It’s estimated that 80 million consumers will see a significant change in their credit scores with FICO 10, which may move them into different credit score ranges.
Less Severe Score Fluctuations
As you may recall from How to Choose a Tradeline, the more data there is contributing to an average, the more difficult it is to affect that average.
Since FICO 10 T looks at your credit utilization for an extended period of time instead of just the current month, it is likely that your credit score will not change as drastically from month to month based on your utilization ratios at the time.
In other words, your utilization data from the past 24 to 30 months will have a stabilizing effect on your score that will protect it from being heavily penalized if you occasionally have high balances.
When Will the New FICO Score Be Rolled Out?
According to FICO, the FICO Score 10 Suite of products will be available in the summer of 2020.