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FICO updates its scoring model every few years making changes, taking into account consumer behavior and vast chunks of data it tracks. This time the company would be releasing two new versions - FICO 10 and FICO 10 T.
Both new scores differ from the previous formula, but the fundamentals haven't changed. Consumers will still need to make timely payments and avoid taking on too much debt to maintain good credit. However, certain financial behaviors that indicate sings of financial weakness will receive more attention.
For example, consumers who consolidate credit card debt into a personal loan and then accrue balance on their cards again, will be judged more severely.
Here are some other changes to expect:
- the new score, FICO 10 T in particular, will look at the past two years or more of consumer balances and payments, which will give lenders more insight into how a consumer is managing credit over time;
- recent missed payments will be weighed more heavily;
- those who use high percentage of their overall available credit for long periods will be penalized.
As a result, consumers who have a high amount of credit card debt vs their overall available credit could see a drop in their scores. Same goes for those who miss payments regularly.
However, people who make on-time payments and don't carry balances at all or carry relatively small balances, may see a slight increase in their scores.
Many lenders are using FICO scores to gauge a borrower's risk. However, most of them are using older FICO formulas and not every lender will use the new scores right away. The time will show whether they are going to adopt the new scoring method or not.
The big three reporting companies - Equifax, Experian, and TransUnion - will offer the updated scores by the end of the year.