What You Need to Know About the New FICO Scoring System

FICO recently announced the launch of its latest FICO 10 model, which could cause an estimated 80 million consumers to see a change of 20 points or more on their credit score. Those who tend to fall behind on payments are more likely to see a decrease in their score, rather than increase.

So, what is just rumor, and what should you actually know about this new scoring system? Let's break it down.

FICO 10 vs FICO 10T

For the first time in the history of FICO, the company will offer two versions of the general FICO score: FICO 10 and FICO 10T. The FICO 10T score has caught the attention of many consumers because it evaluates up to 30 months of past credit data to predict consumer behavior. Think of it like this: FICO 10 is a picture of your credit history, and FICO 10T is a short video.

This new scoring system will also use different reason codes than FICO 10, which will cost more time and money to adopt. Your lender may prefer to use FICO 10 for the time being.

Why is FICO 10T Necessary?

Lenders are starting to take a closer look at potential borrowers for a number of reasons. According to NerdWallet, the economic expansion that allowed lenders to loosen standards is bound to come to an end (and possibly soon.) Also, lenders no longer have a view of how consumers managed the last economic crisis that began in late 2007.

In January 2020, the average credit score in the US topped out at an all-time high of 703. Seems like great news, right? Well, some financial experts believe this may be a sign of credit score inflation. As derogatory marks from the recession begin to fall off consumer credit reports, scores will continue to rise... and so will debt.

Despite widespread credit score improvements, Americans continue to take on more and more debt. Most people who have credit card debt owe at least as much now as they have over the past decade.

Trending Data Could Help

If you've ever experienced a drastic rise or dip in household income, you know how frustrating it can be to deal with a credit score that doesn't fully reflect your financial situation. David Shellenberger, VP of Product Manufacturing at FICO, believes FICO 10T will give a "more holistic view" of a person's finances.

A JPMorgan Chase analysis done in 2019 revealed the average family experienced significant income swings -- increases or dips of more than 25% of their median income -- in five months out of the year from 2013-2018, despite real wage growth and low unemployment during that period. As Americans navigate the shifting economy, promotions, job loss, etc., FICO 10T will be able to better evaluate these swings.

FICO 10 scores won't be available for use by Experian, Equifax, or Transunion before summer 2020. It will be even longer before lenders use this updated system. For large lenders, it may be another year before all changes are in place. (For non-mortgage lending decisions, FICO 8 is typically used. Mortgages, on the other hand, use FICO 2, 4, or 5.)

Will FICO 10T Affect You?

For many Americans, there will only be a slight shift in their credit score. However, an estimated 40 million people could see their scores drop 20 points or more. Your score is more likely to drop if:

• You took out a personal loan to consolidate credit card bills, but now your balances are up again
• You applied for additional credit after taking out a loan to pay for credit card bills
• You've had a consistently high balance (or growing balance) on your credit cards that you can't seem to pay off

The good news is, some consumers could see their score rise by 20 points. You're more likely to see a rise in points if you have been penalized for occasional high balances. For example, if you go on vacation each summer in July, FICO 10T will be able to recognize that trend and adjust your score accordingly.

Are you ready to buy a home but afraid your credit score might hold you back? We can help.

Contact a Mortgage Advisor today to learn more!