FICO recently announced that it is rolling out a new credit scoring system, which includes a credit score called "FICO Score 10 T." The new score takes into account trended data, like whether a consumer’s debt levels are rising and credit management patterns, as well as judges missed payments more harshly. This model penalizes consumers more for poor financial habits than other scoring models do. As a result, if you've been accumulating more debt or recently fell behind on loan payments, you'll likely see a drop in your score—eventually.
These modifications are a reversal from previous changes, like the introduction of the UltraFICO Score and the removal of civil judgments and tax liens from consumers’ reports, which were intended to raise peoples' scores.
FICO’s revamped scoring system evaluates how a consumer’s debt situation has trended in the past 24 months or so, like whether your debt levels have gone up, whether you’ve recently missed payments, and if you’ve taken out any personal loans and then accumulated more debt elsewhere, like on a credit card. This information gives a potential lender insight into your behavior trends and enables the lender to determine if you are carrying balances, consolidating debt, or paying off balances every month.
Under the 10 T scoring system, your score will likely go down if you have a growing debt level. For example, let's say that, in the past, you always paid your credit card bills off in full. But over the past few months, you’ve started carrying a balance. In this scenario, your score will probably fall. However, if you increase your credit card debt during a certain month each year and pay it off quickly, you’ll likely see less of a reduction in your score.
Consumers who have a high utilization ratio (the percentage of your total credit lines that you're currently using) for an extended amount of time will also probably get lowered scores.
FICO’s latest scoring model also weighs recently missed payments more heavily than before. So, if you fall behind in payments or quit making payments altogether, you’re likely to see a more significant drop with this scoring system. But if your last delinquency is at least a year old, you might see your score go up.
While taking on debt has always had an effect on credit scores, under the new scoring model, people who take out personal loans might get an even lower score than under other scoring models. Consumers who transfer their credit card debt to a personal loan, in particular, and then accumulate more debt, like on a credit card, will probably see their credit scores fall.
So, consumers who already have good credit—those with scores of around 680 or higher—who continue to pay down their debts, and who stay current on payments will probably see their scores go up. But consumers with scores below 600, who don’t make their payments or take on more debt, will most likely face a more substantial decline than under previous scoring models. Ultimately, the FICO Score 10 T model is expected to widen the divide between people with good credit and those with bad credit.
This latest scoring model is a reversal from changes that FICO recently implemented. In past years, both FICO and the credit reporting agencies made changes that helped increase scores for some consumers, like removing civil judgments and tax liens from credit reports, as well as deprioritizing medical debts and paid collections accounts. Also, options like the UltraFICO Score and Experian Boost allow consumers to give scorers access to their bank accounts so that details about balances, as well as data about utility bills and other bill payments, can be taken into consideration when calculating a credit score. These alternatives, in theory, might improve a borrower’s score and, accordingly, increase the chances of a loan or credit approval. And, since these changes went into effect, average FICO scores across the country have been going up. Lenders have been able to approve more loans, and credit has generally been more accessible to consumers.
But lenders are becoming increasingly concerned about the economy and whether higher credit scores are making some consumers appear more creditworthy than they truly are. So, the adjustments in FICO’s revised scoring model are designed to counteract the previous changes that lifted many consumers’ scores.
It’s important for those with bad credit—as well as those with good credit who want to maintain that status—to know about this adjustment and learn how to proactively take steps to monitor and manage their credit information. But be aware that the scoring changes discussed in this article apply only to the newest FICO scoring model, and FICO has more than 40 different models. (The company updates its scoring model every few years to reflect changes in consumer borrowing behavior and performance.) FICO also offers industry-specific variations of its scoring models, like for the mortgage industry. So, a person’s credit score will likely vary depending on the model used to produce it—like FICO, FICO 8, FICO 9, or FICO 10 T—and which credit reporting agency provided the underlying credit report.
Whether most lenders will choose to use this updated scoring version, available in the summer of 2020, is yet to be seen. Lenders have traditionally been slow to adopt new scoring models, and they can also choose to use a different kind of credit score other than FICO, like VantageScore. (The three major credit reporting agencies came up with VantageScore to compete with FICO scores.)
So, instead of being too worried about this model just yet, it's a good idea to focus on maintaining responsible spending practices, like paying off your credit card balance in full, staying current with your other bills, keeping your debt levels low, and taking action if you need to start improving your credit score. That way, when and if this scoring system becomes the norm, you'll be ready.
Effective date: January 23, 2020