Credit scores have new meaning

Castles in the Sand

Just when you think your credit score is safe, you get pulled back in and find out you may not be as safe as you thought. If you have anxiety about your creditworthiness you have yet another reason to be freaked out based on credit score rules that are changing.

At the end of January, changes were announced in how the most widely used credit score in the country is calculated. The result is making it harder for many Americans to get loans, but it may also boost credit scores for others.

Fair Isaac Corp., the creator of the FICO scoring method, will soon start scoring consumers with rising debt levels and those who fall behind on loan payments more harshly. They will also flag consumers who obtain personal loans which are basically unsecured debt. This is especially true if these loans are used to buy down an individual’s credit card debt only to then have the individual continue to rack up credit card balances. Conversely, consumers with already high FICO scores of about 680 or higher who continue to manage loans well will likely get a higher score than under the previous FICO versions.

Essentially the new FICO Score, which is called FICO 10 Suite, is looking for a trend line, giving lenders a more up-to-date picture of an individual’s credit history. Typically, lenders used credit scores, which are just a snapshot of a consumer’s credit worth but do not go into more detail about how they are utilizing their credit.

With the FICO 10 Suite revision, those with already low scores below 600 who continue to miss payments or accumulate other poor marks on their credit history will likely have larger score declines than under previous models. FICO scores range from 300 to 850 and a score of about 700 or more is considered good. In addition, FICO says the new model is designed to reduce the number of defaults for credit cards, car loans and mortgages.

Since credit scores help to determine the interest you will pay when you borrow and subsequently what you purchase, this new scoring method can be very significant to the economy. For example, on a $250,000 mortgage, the lifetime savings could be about $40,000 just because you qualified for a lower interest rate loan if you had a higher credit score.

The new FICO Score 10 Suite model won’t be available to lenders until this summer, but consumers must start paying attention to the changing credit scoring landscape and work toward improving their scores. You can start by checking your credit report and correcting anything that could impact your credit score as well as paying credit cards, mortgage and car loans on time.

All of this said, consumers will not see an immediate change in their credit score – it will take some time, maybe even more than a year for the new system to take effect. In addition, lenders are not obligated to use the new method in evaluating a consumer’s credit history. Lenders use a variety of scoring models and some won’t be using the new FICO model at all.

If you think you will be needing credit in the near future, especially for a mortgage, get your ducks in order so when the time comes anxiety doesn’t get the best of you. Put the credit card back in your wallet and skip the Starbucks.

More Castles in the Sand:

Let’s all just take a breath

Broken record analysis

What does a mortgage broker do?