The previous scoring models took snapshots of a person’s payment history. The new model will have a historical view of payments over time and can process much more information, including account balances for the previous two years, with the aim of providing lenders with more information on how individuals manage their credit, he said. FIG.
About 80 million people will see a shift of 20 points or more, according to a statement by Dave Shellenberger, vice president of product management at FICO. Of these, about half will see their scores rise, while the other half will see their scores drop.
Those who have a high amount of credit card debt compared to their overall credit, or who have recently lost payments, may see a more significant drop.
But people who make timely payments and don’t have high balances are likely to see a slight increase in their score, said Shellenberger.
With a longer view of payments, consumers who pay their credit cards monthly will not be penalized as much for one-off purchases and occasional high balances. But those who constantly maintain a balance will see a drop in their credit score. Monthly payment of credit cards will always result in a better score.
FICO estimates that another 110 million consumers will see only a modest change to score, if at all, he said.
“The bad news is that those who were already struggling to get into debt will be hit more drastically by the recent changes in FICO,” said Sefa Mawuli, Citrine Capital’s wealth adviser.
“The good news, however, is that the fundamentals we emphasize have not changed: making timely payments, avoiding taking on too many debts. Those who comply with these guidelines will not see their credit score go down under the changes,” he said.
The new model targets personal loans, potentially penalizing those who use them, said Justin Pritchard, a certified financial planner and author of “Everything improves your credit book: boost your score, lower interest rates and save money”.
“We have seen numerous personal loan providers enter the market in recent years, so it is not surprising that these debts are increasing,” he said. “People can borrow money online at competitive prices.”
The new changes will go into effect this summer.
In the meantime, Pritchard said, the basics of maintaining a good credit score still apply: paying off debts on time, keeping credit card balances low, and not getting more credit than necessary.