The company that calculates our credit scores is making changes in the way it comes up with your number. The name of the company is Fair Isaac Corporation, hence the term FICO SCORE.
FICO scoring models are typically updated every few years. With the latest change, your score will still be based on how much you owe, the number and types of accounts you have, and of course your payment history. But in the future, even if you pay your credit card and loan bills on time, your credit score might drop if your report shows a trend that your debt balance is going up.
Ted Rossman of Bankrate.com says one key adjustment involves the use of what’s known as trended data.
“One prime example of that is that recent behavior has the potential to help or hurt you more than in the past,” Rossman explained. “So, if you have a recent late payment, that’s going to have a big negative effect. Also, if you used to have better credit habits, like maybe you used to have a better on time payment history or you used to have lower debts, your debt has crept up. Trended data has the potential to negatively affect you for that reason,” Rossman said
Experts say under the latest credit scoring model people with scores below 600 could see their credit score drop by 20 points or more. Reports indicate some people might also face a credit score penalty for signing a personal loan, which is generally considered more risky because it’s not secured by thing with collateral value like your home or car.
How will your credit score hold up to the newest scoring model changes?
“The flip side though is that if you’re improving. If your the proverbial C student that starts getting a bunch of As, that’s going to help you,” said Rossman, using student grades as a metaphor for debt management.
Professionals in the non-profit credit counseling industry say this is another reminder of the importance of identifying your risks of drowning in debt, if you’re barely keeping your financial affairs afloat.
“This is where a non-profit credit counseling agency can directly assist in helping you get a plan to fix the issues that are holding your credit score down, get back on track with any bills that you’re paying late, and have a chance to completely restore any issues that are having an effect on your personal finances. Now is the time to do that, said Bruce McClary with the National Foundation for Credit Counseling.
“Some people might look at that 20 point decrease and say, ‘Well, that’s not a big deal.’ But if you’re on the threshold of either qualifying for credit or not, that 20 points can put you totally out of the game.”
Both McClary and Rossman agree that people may not be impacted right away by the recent FICO adjustments, since many lenders are still basing their loan decisions on older FICO scoring models.
As months go by, however, that could change, especially since consumer credit debt nationwide is now higher then levels before the financial crisis of 2008 and more people are dangerously over their heads in credit card and loan debt.
“I wouldn’t worry too much about being impacted right away by this, McClary said. “But if you do think that you will be impacted, now is the time to start addressing the problems that are holding your credit back.”
People who follow these FICO changes say if your credit score is 700 or higher, you could see a 20 point increase in your score and some people will see no change at all. But the key for everyone is to always pay more than the minimum payment, keep your overall debt balance going down, and whenever possible, pay before your payment is due, since the information that goes on your credit report is usually based on how things look as of your monthly statement date.
If you do have poor credit, beware of credit repair scams that promise to help you lower your debt. Regardless what you hear or see in advertising or solicitations, always seek help from a certified, non-profit credit counseling agency, or a licensed attorney, and never pay sums upfront.