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New FICO Credit Scores Will Affect Millions of Americans

FICO, provider of the most widely used credit score[1] in the U.S., is making big changes to its credit scoring system that will take effect this summer. The company says[2] these changes will likely affect 110 million Americans, whose credit scores will either go up or down. Some 80 million are likely to see significant changes of 20 points or more.

Here’s what you need to know.

Why is FICO making these changes?

One reason is that credit scores for U.S. consumers have been creeping up since 2009, reaching an average[3] of 706. The higher scores reflect some combination of improved creditworthiness as the economy has strengthened, changes to FICO’s scoring over the past several years, and the effects of a settlement[4] between several states and the nation’s three biggest credit reporting companies, TransUnion, Equifax, and Experian. As a result of that settlement, the credit reporting companies expunged negative credit items from millions of Americans’ reports. FICO is adamant that the improving scores reflect improving creditworthiness, not artificial score inflation, but at least some lenders are not so sure. They’re also concerned about what will happen if the economy weakens.

Using its new FICO Score 10 T, lenders will be able to make better lending decisions, the company said in a press release. This could result in as much as a 10 percent reduction in defaults on new credit cards, as much as a 9 percent reduction in defaults on new auto loans, and as much as a 17 percent reduction in defaults on new mortgages, the company claims. Lenders will have the option to retain the previous FICO score, but it seems likely they’ll switch over to the new one.

Will my credit score go up or down?

It depends. According to[5] the The Wall Street Journal, The new score will take into account two years of debt levels rather than just the previous month. That means if, say, every year you run up a lot of credit card debt buying presents at holiday time, but then you quickly pay off that debt in the new year, the negative effect on your credit score will be smaller than in the past. On the other hand, if your debt level has been increasing over time, you’ll see a bigger hit to your credit score than in the past. Missed payments will also weigh more heavily than they did before. On the other hand, if it’s been more than a year since you last missed a payment, you may wind up with a higher score than you would have had before. 

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