FICO updates credit score- should you be worried

FICO Updates Credit Scores: Should You Be Happy or Worried?

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The fact that FICO updates credit score formula might cause many sleepless nights! Why? Because, your creditworthiness may (or may not!) get hit with the tweak. And the worrisome part is that it has nothing to do with what your latest financial activities.

how FICO calculates credit score - graph

FICO Updates Credit Score: What’s the News Is All About?

The announcement came on 23rd January,2020, when FICO declared that they will include debt levels of consumers to make the scoring model a friendly one for consumers who enjoy sound financial standing. Simply speaking if you have taken a loan and making the payments timely, then you might see some improvement in your  credit score.

The company is very confident that the latest versions, i.e. FICO 10 and 10T, scheduled to be released this summer, will reward the good borrowers while penalizing the bad ones.

Why FICO Updates Credit Score Periodically (Every Five Years, to be Precise)?

They have quite a good logic as they justify the upcoming updates.

You have to agree that computer operating systems and mobile devices have evolved over years to meet changing demand of consumers. Yet their basic functionality remains same. The similar logic is applicable for  FICO scores. It too needs to be updated with time, to match consumers’ changing risk profile and credit behavior.

However the ulterior motive of every update remains same. Every new version aims to help lenders take accurate lending decisions, which simplifies and strengthens the entire credit process system.

FICO Credit Score Updates: Who Are The Winners and Losers?

FICO updates credit score- should you be worried

It is estimated that around 110 million consumers are likely to experience less than 20 points score change, after the update. On the other hand, 80 million consumers will see a change of 20+ points. Out of this 80M, around 40 million consumers’ score will improve while the rating will deteriorate for the rest.

The figure may sound quite intimidating for many. Simply because  the total household debt in the United States has grown alarmingly over past two years. According to last September 2019 data released by the Federal Reserve Bank of New York, the current debt figure is around $13.95 trillion! This number is worryingly higher than $12.68 trillion, which was the previous highest figure as reported before the financial crisis in 2008.

Who Will Be Most Affected As FICO Updates Credit Score?

  • If your score is below 600 then it will experience bigger fall under this new model.
  • Your credit score will be affected if you are not making loan payments on time.
  • If you have taken unsecured loans which don’t need collateral, it may go against your credit score too, after the update.
  • FICO tweaks may affect those who use a major percentage of the total available credit for a long duration. For instance, unemployed individuals who rely on credit cards during periods of financial stress.
  • Those who have previously made credit-card payments on time but have recently (may be for last few months) started increasing their balances are likely to be penalized with a lower score.
  • Have you transferred your credit-card debt to a personal loan? May be you used the credit card to fund your business for few months. Now if you are racking up more debt and not doing anything about it, then this action may lead to a significant drop in your credit score.

FICO Scores: Does It Really Influence Lenders?

As clarified by FICO, their scores are trusted by more than 90% lenders. This simply means if you are applying for a mortgage, credit card, line of credit (LOC) or car loan, the lender will check your FICO score before approval.

Time and again it has been proved that lenders expose themselves to less risk and offer quick loan to customers by looking at FICO scores. However it is not necessary that lenders always opt for latest FICO versions.

It is interesting to note that FICO released version 9 in the year 2014. And yet many lenders continue to use FICO 8, released in 2009. This might be because lenders are sometimes reluctant to totally transform the underwriting process.

However with the latest FICO score update, the company is quite optimistic. They believe  lenders will implement the new model by the end of 2020. According to Dave Shellenberger, FICO vice president of scores & predictive analytics, “when we release a stronger more predictive model we see that lenders will migrate to the stronger model because it allows them to make more loans to more consumers without taking more default risk.”

Still the fact remains is that every lender might not start using new scores immediately. For instance, if you are applying for a home loan, the lender is most likely to use the older FICO formula. This is especially applicable, if the home loan is guaranteed by Fannie Mae and Freddie Mac

At the same time, all of these reputable credit-reporting companies, e.g. Experian, Equifax, and TransUnion have agreed to implement FICO updated scores by this year end. In all probability, Equifax will do it first, as confirmed by FICO official.

To Sum It Up

It all comes down to one thing. You need to adopt the right measures to improve your credit score, to maintain a stable FICO score. Here, FICO has offered some help by clearly narrating how to repair your credit and improve FICO score. If you give it a look you will find nothing has changed fundamentally. In fact, some of the good-old traditional recommendations still make sense.

According to experts, you shouldn’t get too worried with the news that FICO updates credit score. The update is nothing but an attempt to accurately assess risk and not just reward people with higher score by default.

They also say that you may not feel the pinch at all if you decide to follow good financial habits and reduce your debt burden as much as possible.

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