New FICO Score 10 Suite May Impact Your Credit Score Among other enhancements, including trended credit, “...FICO Score 10’s backward compatibility to previous FICO Score versions ensures continuity, ease of use and stability for lenders and investors. Lenders can more easily transition to FICO Score 10 since it includes standard FICO reason codes, a similar odds-to-score relationship as prior versions and consistent score ranges…”
The FICO Press Release January 23, 2020: FICO Introduces New FICO Score 10 Suite
The following column was published by Steve Altonian, The Credit Cowboy, on January 29, 2020. His insights and research on the new FICO Score 10 Suite are quite valuable.
Your credit score — that all-important passport within the financial world — is about to change. And it won’t necessarily be because of anything you did or didn’t do.The Fair Isaac Corporation, the company that creates the widely used three-digit FICO score, is tweaking its formula. Consumers in good financial standing should see their scores bounce a bit higher. But millions of people already in financial distress may experience a fall — meaning they’ll have more trouble getting loans or will pay more for them. Initial projections are consumers with a 680 plus FICO should get a 20 point increase….600 & below a 20 point decrease.The changes don’t alter the main ingredients of your score, but they do take a more finely tuned view of certain financial behaviors that indicate signs of financial weakness.For example, consumers who consolidate their credit card debt into a personal loan and then run up the balance on their cards again will be judged more severely.“The new scores reflect nuanced changes in consumer credit trends that we observed from our analysis of millions of credit files,” said Dave Shellenberger, vice president of product management at FICO, whose scores generally range from 300 to 850 (the higher, the better).
What’s changing?Some of the changes, like carrying a personal loan as well as credit-card debt, affects both new scores. But there are more substantial changes involving the FICO 10 T version. The biggest shift, however, concerns the amount of debt you carry, experts said. In the past, people trying to polish their scores right before applying for loans were told to pay off their credit cards or get the balances as low as possible a month or two before submitting an application. That won’t work as well now.1. Trended Data– Instead of looking at just a static month of your balances, FICO 10 T will look at the past two years or more, which will give lenders more insight into how you’re managing your credit over time. That should mean your scores will better reflect the trajectory of your behavior. This also means late payments will now have a bigger increase on the scoring model. (Incidentally, VantageScore, a lesser-known score provider that is a joint venture of the three big credit-reporting companies, has already incorporated this into its formula.) I am wondering if this will close the scoring gap between a “soft-pull” & a “hard-pull”. Say, for example Credit Karma. It seems to me that gap may close point-wise. We shall see….Trended data gives lenders a different view of borrowersFICO 10T will use trended data to show lenders something different about borrowers from their traditional information. Trended data gives prospective lenders borrowers’ key balance and payment data for the past 24 months, which enables them to see consumers’ behavior trends and determine if they’re carrying balances, consolidating or paying off their balances each month. “Many lenders want to leverage the most comprehensive data possible to make precise lending decisions,” Jim Wehmann, executive vice president for scores at FICO, said in a news release. “By offering a score that taps further into trended data, we’re able to give lenders greater flexibility and predictive power, as well as ease of integration.”A high credit utilization ratio (the percentage of total debt you’re carrying compared to total available credit) isn’t a new red flag for lenders, but the FICO 10 T score gives that statistic even more weight if credit card balances hover close to set spending limits for an extended period of time. It’ll also look at how your debt balances have changed—and if they’ve been climbing over time.“Previously we have only really looked at the most recent balance for that important information,” Shellenberger said. “Whatever has been reported by the credit card company is what that score is based on. But now we can look at how that has trended over the past 24 months. It looks at averages rather than one or two points in time where your balances were higher.”Paying off your card a month or two before you apply for a Mortgage loan? That’s not the best advice anymore, & The Credit Cowboy has been giving that advice to his clients for years. Now, my advice is changing: You want to get your credit card balances down multiple months in advance, or at least have them trending down for months in a row and then have balances at a low before you apply. You need to plan ahead, whereas before you did not. THE FUNNY THING IS: When I first got into the credit repair business as a young man, I erroneously believed they used TRENDED DATA at the time. I stopped telling people that about 8 years ago, and now today that is EXACTLY the scoring model we have in place….I just made sense to see a trend than to allow someone to all of a sudden pay down a credit card and all is good.2. Installment loans carry LESS weight on the FICO modelThis is the first time a FICO scoring model looks closely at how consumers are using personal loans to see if there is reason to penalize a borrower.“We are now able to distinguish personal loans from other credit obligations, so we can look at personal loans along with everything else that’s going on in your credit profile,” Shellenberger said.For example, if you transfer credit card debt to a new personal loan account but then use your freed-up spending limits to accumulate even more debt, that may ding your FICO 10 T score.“The FICO score has always taken balance-type information into account and that’s still a critical component.”Why change scores now?FICO adjusts its scores every few years, drawing on consumer behavior and patterns that emerge from the vast trove of data it tracks. This time, the company is offering two new scores, FICO 10 and FICO 10 T, and both differ from the previous formula.Given the strength of the job market and other factors, many consumers are managing their credit well. Late payment rates across all household debts are at their lowest levels since at least 2005, according to a recent analysis from Moody’s Analytics, and credit scores have been trending higherEven so, a significant number of lower- and middle-income Americans are struggling, and consumer debt levels are quite high. And lenders are always trying to shield themselves from losses, should economic conditions deteriorate. FICO says the new scores will make it easier for lenders to gauge a borrower’s risk.How and when will the changes affect me?Most consumers, or 110 million people, will see modest swings, if they see any change at all, according to FICO. But about 40 million people who already have favorable scores are expected to gain about 20 points, while another 40 million with lower scores will probably see a drop.But not every lender will use the new scores right away.People applying for most mortgages will not be affected, at least for now. That’s because home loans guaranteed or backed by Fannie Mae and Freddie Mac, which include the vast majority of mortgages, are still required to use older versions of the FICO score.Many other lenders are also using older FICO formulas, and it remains to be seen how quickly they adopt the new scoring method — or if they will decide to change.The big credit-reporting companies — Equifax, Experian and TransUnion — will all offer the updated scores by the end of the year. Equifax will be firstHow can I improve my score?Because the FICO 10 T calculation has a longer field of vision, it pays to get your financial life in shape as early as possible before applying for a loan.You still want to review your credit reports, which contain the raw data that power your scores, at each of the three big reporting companies. But now you should plan further ahead and check them even earlier, because an error about a missed payment can hurt you more, and correcting the mistake can take time.
Financially Speaking™ James Spray RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 | January 25, 2020
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