How Will the FICO Changes Impact You?

Blog posted On February 05, 2020

Your FICO credit score is generated by the major credit reporting bureaus: Equifax, Experian, and TransUnion. A higher FICO score can help you apply for a loan and even get a lower interest rate. However, this latest change may leave many consumers with a lower score and influence your mortgage approval.

FICO is planning to change how the score is calculated. With this update, called FICO 10, FICO will score consumers with rising levels of debt and missed payments more harshly than on previous scores. 

These changes will likely lead to a larger gap between consumers deemed as good and bad credit risks. So, consumers with scores of 600 and below who continue to miss payments will experience steeper declines than in the past. On the other hand, consumers with high credit scores of 680 and above will likely have a higher score than under previous calculations. With these new changes, millions of consumers may see their scores decline, while millions of others may see an improvement. These changes are a major switch from recent years, in which credit reporting companies removed negative information, such as civil judgements, from credit reports in order to boost scores.

Another variation of the FICO 10, called FICO 10 T, will focus more on each consumer’s debt levels during the past two years. A consumer who falls behind on payments may see a sharp decline, while consumers whose last delinquency is a year old may see an improvement in credit.

These changes may impact the way lenders are able to easily identify more creditworthy borrowers. These changes also reflect a shift in lenders’ outlook of the economy. Though the economy has been expanding for more than 10 years and losses are low, consumers are carrying record amounts of debt. 

The average FICO score has been rising since economic recovery, yet many of the consumers are relying on debt to fund their everyday lives. Many consumers have rising credit scores at the same time as rising debt, causing these consumers to appear more creditworthy than they actually are. This new version of FICO score aims to reflect a more accurate depiction of consumers’ creditworthiness by placing heavier weight on debt levels.  Whether to adopt the FICO 10 or not is up to the lender, though most lenders already use a certain version of the FICO score for government sponsored enterprises. 

Though these changes may cause your FICO credit score to decrease, it will not bar you from qualifying for a loan. There are several loan options available for consumers with less-than-perfect credit scores. A lower credit score may leave you with a higher interest rate, need for mortgage insurance, or larger down payment requirement. If you have any questions about how your score will be impacted, let us know. 

Sources: Wall Street Journal, MarketWatch, Realtor.com