Credit Strategist: Big Changes Are Coming To America’s Credit System, From FICO To FICO 10T

Credit Strategist: Big Changes Are Coming To America’s Credit System, From FICO To FICO 10T

FICO changes

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Many news reports about the changes to the U.S. FICO credit scoring system put a positive spin on it, leading with such headlines as “This Credit Score Change Could Work to Your Benefit” or “Changes Could Improve Your Credit.”

Business strategist and credit consultant Autumn Starr warned her followers on Twitter that a lot of people’s scores will change in the future as a result of the FICO changes, and they should be prepared.

The FICO scoring model is meant to give lenders—and sometimes employers—a pretty good idea of how you handle money. The Fair Isaac Corporation (FICO) is a company devoted to predictive analytics—in other words, the likelihood that you will act in a specific way. Your three-digit FICO score shows a lender how you might handle credit.

The newest FICO credit scoring model, the FICO Score 10 Suite, consists of two scores: FICO 10 and FICO 10T. The FICO 10T credit score includes trended data, which looks at individual consumers’ payment and debt history for the previous 24-plus months to help calculate their credit scores.

FICO said the Score 10 T uses a powerful new set of predictive characteristics generated from both traditional and trended credit bureau data.

“Right now if you run your credit they take a snapshot of what your credit looks like right now,” Starr tweeted. “But, what the new fico system is going to do is see what your credit has looked like in the past … So say you had a collection back in March 2020 they are going to see that and calculate it into your score.”

Even though a few of the details have shifted, the foundational principles of credit scores remain the same, according to Carrie Schwab-Pomerantz, an advocate for financial literacy and president of the Charles Schwab Foundation.

Lenders are now reassessing borrower risks, pulling back in certain areas, lowering credit limits for consumers who have poor or shaky credit histories and tightening auto-loan underwriting by increasing borrowing rates, Schwab-Pomerantz wrote.

“The new FICO score is reported to give more weight to rising levels of debt, higher debt utilization (the ratio of the amount you borrow relative to the amount of credit available to you), and late payments. Unsecured personal loans (those that don’t require collateral like a home or car) are also being reconsidered,” according to Schwab-Pomerantz.

On the plus side, people who make payments on time, pay off debt and use less of their credit line may see their scores go up. Other recent changes to credit scoring models over the past few years have helped new borrowers with limited or tarnished credit histories by considering things like timely rent, utility, cell phone, and cable payments as well as bank account balances.

Consumers have more than one credit score and different scoring models can be used to calculate that number. FICO is the most common, but many lenders rely on VantageScore too. As of the end of January 2023, VantageScore will no longer include medical debt in scoring calculations. So you won’t have to worry about a delinquent medical bill due to a lack of funds or an ongoing battle with your health insurance company.

And new mortgage financing policies from Fannie Mae and Freddie Mac will reduce the cost of having a lower credit score.

Some of the FICO changes have already been implemented at some banks but not all the banks have signed up yet, Starr tweeted.

FICO 10 and FICO 10T don’t replace other credit scoring models, such as FICO 2, 4, 5, 8, or 9, which lenders can still use in making credit approval decisions.

Starr encouraged her followers to repair their credit within the next 90 days and prepare for the upcoming changes in the financial system.

“Some banks are still using FICO 7, 8 or 9,” Starr tweeted. “Banks are slow. That is why it’s super important to fix your credit right now. Don’t wait! It is an INVESTMENT not a BILL … Have good credit and access to capital, will be your greatest asset when the wealth transfer occurs.”

You can read more here about the new consumer law rights taking effect in 2023.

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