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A credit report

Your credit score impacts several aspects of your financial life, including the interest rates you receive on loans and premiums you pay on auto insurance. As such, understanding how credit scores are calculated is crucial to making sure you maintain a strong score. Recently, Fair Isaac Corp. announced big changes in how it calculates its FICO® credit scores. So what do these changes mean for you, and what should you do differently?

New FICO® Scores Explained

Fair Isaac Corp. has recently developed a new suite of credit scoring models. These models will become available for the credit reporting agencies (Experian, TransUnion, and Equifax) in late 2020. With these new models, you will have to pay closer attention to your late payments and revolving debt since these factors will have a greater impact on your new score. Additionally, these models will consider your credit card payment amounts and balance history. All of these factors will affect your credit score.

The last time FICO® came out with a new suite was in 2014 when it created FICO® Score 9. The new suite consists of FICO® 10 Score and FICO® 10 T Score. FICO® developed both models to provide lenders with the flexibility to select which approach works best for their business. While the new versions treat information similarly to the previous versions, there are a few key differences you should be mindful of to ensure you maintain a good credit score.

FICO® 10 T Reviews Trended Data

Digital images of individuals with each one's credit score

The goal of the FICO® 10 T model is to give lenders a more precise assessment of your credit risk by considering trended data. In addition to considering the five main credit assessment factors, the FICO® 10 T model reviews information on your credit report about how you have managed your accounts within the last 24 months. This helps lenders create a better picture of your unique financial situation during that time. While lenders may have had this data in the past, it’s now a part of one of two scoring models (including the VantageScore® 4.0) that uses it in the credit evaluation.

Your credit card trended data will now include your account balances, minimum payment requirements and the amounts you paid on your revolving credit card statements for the past 24 months. By evaluating this data, the credit scoring models can determine which consumers pay off their credit card in full every month and those who leave a revolving balance. Consumers who pay off their credit cards every month are considered a lower credit risk than those who leave a revolving balance.

Also, trended data includes information about your credit card balances and if they are dwindling or increasing over time. If they are increasing over time, then you have a higher credit risk. All of these factors can help you and lenders make better and more responsible credit decisions.

So, what does this mean for you? If you want trended data to work in your favor, you will need to pay close attention to your credit card payments and the amounts you’re paying. Also, consider your revolving balances at the end of every month and focus on paying those off. If you prioritize repayment and reducing your balances, the FICO® 10 T and VantageScore® 4.0. models may work in your favor. Not only will you have a better credit score, but you’ll save money on interest in the meantime.

Delinquencies Carry a Greater Weight Under FICO® 10

When you miss payments on your debt obligations, delinquencies will appear on your credit report. Once you have gone at least 30 days past due, lenders will report these occurrences to the credit bureaus. No matter which credit model lenders use, late payments may result in lower credit scores, which may not give you the most favorable rates or terms.

Now with the FICO® Score 10 Suite, delinquencies will carry more substantial weight than previous credit scoring versions. This means that, under the FICO® 10, you may experience significant decreases to your credit score if you miss payments.

To avoid delinquencies, ensure you make all payments on time. It’s wise to set up auto-pay, so you never miss a payment. Even if you set up auto-pay, you can still make larger payments throughout the month to pay off your balance every month. By staying current on all your accounts, you can maintain a good credit score, no matter what model a lender uses to assess your credit risk.

Credit Utilization Will Have A Greater Impact With FICO® 10

One of the most important metrics credit bureaus use to determine your credit score is your credit utilization ratio. Your credit utilization rate is your credit card balances compared to your total amount of credit available. For example, if you have $20,000 of credit available and have $5,000 of credit card debt, your credit utilization ratio is 25%. The lower this percentage is, the better your credit score will be.

While evaluating credit utilization has been a metric used in most scoring models, it will now have a greater impact when using the FICO® 10 model. To achieve a low credit utilization rate, you must first avoid high revolving debt balances. You should also keep credit accounts open even if you don’t use them. By keeping your accounts open, you can continue to benefit from the available credit limit. This will then lower your credit utilization rate because you have more credit available.

Personal Loans May Decrease Your FICO® 10 Score

In contrast to past scoring versions, the new FICO®10 model may treat personal loans differently. They may do so by dinging you for having a personal loan on your credit report.

In many cases, personal loans help consumers pay off credit card debt, which is also known as debt consolidation. To pay off high-interest debt, consumers will take out a personal loan with a lower interest rate to save money. Under the FICO® 10 model, this is still a good solution for consumers as long as they receive a lower interest rate.

However, if you rack up more credit card debt while you’re paying off your personal loan, which you used to consolidate your debt, this may substantially impact your credit score. Therefore, it’s important to avoid using your credit cards if you’re in this situation.

Other Scoring Considerations

Worried man looking at his financial records on a home computer

In addition to the changes above, there are a few other considerations you need to be aware of. First, if you currently have an excellent credit score, you’ll likely to have an even better FICO® 10 Score. Conversely, if you have a poor credit score, you may have an even lower credit score with the new FICO® 10 Score.

It’s important to note that new FICO® 10 Score will have the same range as the old model (300 to 850).

The Bottom Line

Even with the new updates and changes to the scoring models, you can still use traditional advice for maintaining a good credit score. However, you may have to pay closer attention to your trending data, recurring credit payments and your credit utilization rate. And, if you take out a personal loan to consolidate your debt, be sure to avoid using your credit cards.

By maintaining positive financial habits, you can be sure that no matter what credit scoring model lenders use, you will reap the benefits of a high credit score.

Tips for Maintaining Good Credit

  • A financial advisor can help you understand how your credit score impacts your financial plan. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • It can be easy to fall into credit card debt. Should you end up with a negative entry on your credit report, like a charge-off, you should immediately fix it. You can’t always reverse it. Plus, that usually can only be done by paying in full and negotiating with the creditor. However, it can still help to talk to the creditor and pay back what you can.

Photo credit: ©iStock.com/courtneyk, ©iStock.com/Arkadiusz Warguła, ©iStock.com/domoyega

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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