Most people are familiar with the term FICO score – that’s your credit score -and it can have an enormous impact on one’s life, affecting your ability to buy a home, a car and much more.
So, it’s worth noting that changes are coming this summer to the scoring system, used widely by credit agencies and financial institutions around the world to determine your credit worthiness. With the changes may come the risk of a lower score for some, according to experts in the field. The new system, called FICO Score 10T, looks back two years or more at a consumer’s debt levels rather than the most recent month’s data, said author Bernice Napach. Currently, and for many years, your FICO score was based on your previous month’s debt information.
Consumers with positive FICO scores — 680 or higher — could conceivably get a boost in their credit scores once the new system takes effect , assuming they continue to manage their finances well. But those with lower scores — below 600 — could see their scores decline, according to a report in The Wall Street Journal.
In a news release, FICO, said the new system enhances the “predictive power” of credit score ratings, which can help reduce the number of defaults in lenders’ portfolios. Comparing FICO Score 10 to FICO Score 9, the default rate on newly originated mortgages could fall by 17 percent and on new bank cards and new auto loans by 10 percent and 9 percent, respectively.
“These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers,” said FICO. More than 90 percent of lenders’ consumer credit decisions are based on the FICO score,” according to the company.
In a ThinkAdvisor post, analyst Ted Rossman of CreditCards.com says, “Lenders will be drawn to the much lower default rates the FICO 10 Suite is promising.”
Referring to the 24-month-plus lookback, Rossman explains: “FICO 10T will incorporate trended data, which basically means that they’re going to try to smooth out the peaks and valleys. A temporary spending spike such as a vacation or holiday shopping won’t hurt your credit score as much if you generally keep your credit utilization low. Ultimately, though, change comes slowly in credit monitoring. “
The Federal Reserve Bank of New York, reports that household debt in the United States has grown for 21 consecutive quarters through Sept. 30, 2019, to total a record $13.95 trillion. Mortgages account for the largest portion, at 68 percent, with, 11 percent attributed to student loans, 9 percent to auto loans and 6 percent to credit card loans. The remaining 6 percent is split evenly between revolving home equity loans and other loans, the bank said.
If you need help understanding your credit score or determining whether your it is satisfactory for your planned credit and/or borrowing needs, please reach out to a tax advisor at Diamond & Associates, CPAs. We are here to help!