How is the FICO score changing?
Historically, your FICO score was based on how much you owed and your payment history over time. The FICO score model took snapshots of your payment history and debt levels; these snapshots were more heavily weighted on recent transactions. The new FICO score model will consider your financial data over a two-year period. In addition, FICO scores will pay closer attention to your use of personal loans.
Why is the FICO score changing?
Credit card debt is soaring, and an increasing number of people have begun using personal loans to consolidate their more expensive credit card debt. While it makes sense for some people to do this, a growing number of people are allowing their credit card debt to build back up again, leaving them with both credit card and personal loan debt. Lenders are also recognizing the need to take a more comprehensive look at the way in which you use debt over time, not just in snapshots. Enter: a new way to calculate the FICO score.
Who will be affected and how?
Virtually everyone will be impacted by the FICO score update. About 60 percent of us will see a change of less than 20 points, while the remaining 40 percent will see an increase or decrease of more than 20 points. Of those with a change of more than 20 points, about half will see an increase and the other half will see their FICO score drop.
The New FICO Score Method Will:
Reward you if…
you keep credit card balances low, make your payments on time and regularly make more than the minimum payment to reduce your overall debt.
Penalize you if…
you move or consolidate your credit card debt using a personal loan, and then allow your credit card balances to build again.
What should you do to protect your FICO score?
Don’t panic but be proactive. Take these simple steps now to improve your FICO score.
- Monitor your credit report, and correct errors if you find them
- Pay your bills on time
- Reduce your credit card debt
- Avoid taking personal loans
Most experts encourage people to keep their credit utilization ratio (the amount of credit you’re using divided by the total allowable credit available to you) at less than 30 percent. Take a few moments now to calculate your ratio, then set a plan to move it as close to 10 percent as possible.