The company responsible for FICO score has created new credit scoring models that will be available from all three credit-reporting agencies —Experian, TransUnion, and Equifax—by the end of 2020.
So, if you’re going to be applying for a mortgage to buy or refinance your home, you should pay attention to the way it’s going to affect your credit score. While FICO 10 will handle the data it gets from credit agencies in the same way as earlier FICO releases, FICO 10T will be the first FICO scoring model to use “trended data.”
The difference between trended data and the current way your credit is scored is a bit like the difference between a picture and a video. Current FICO models look at a single moment in time. The new FICO 10T tracks credit and debt activity over 24 months to create a more accurate picture of a borrower’s spending and credit management habits.
It will reward borrowers who consistently manage their debt well over time, and penalize those who get their credit in shape when they are applying for a loan and return to bad habits after the loan is approved.
Here are the most critical changes:
Total debt is the most important
FICO 10 gives more weight to the total amount of debt you carry rather than where you put your debt. Moving mortgage from a credit card to a personal loan, or consolidating your debt with a low-interest card, will lower the amount of interest you pay every month, but it won’t reduce your total debt. FICO 10 is primarily interested in monitoring your credit card balances to see if they are consistently increasing or you are routinely seeking new credit.
Consolidating debt doesn’t help
FICO 10 weighs personal loans more heavily than earlier releases to penalize borrowers who consolidate credit card debt with low-interest loans, but then rack up more debt after their scores improve.
Delinquent payments will hurt more
Delinquencies on your credit reports occur when you miss payments on your credit obligations. Lenders generally report these late payments to the credit bureaus once you have gone at least 30 days past the due date. Consumers who miss or are late making payments likely will experience a more severe drop in their credit scores under FICO 10 than under previous FICO scoring models.
Too much credit card debt will be penalized
FICO10 treats different types of debt differently. Revolving credit, such as credit card debt and lines of credit, is a more significant factor in determining your score than installment credit, which includes mortgages and student loan debt. Using credit cards more than other sources of available credit will lower your score more under FICO 10. If you use credit cards sparingly and avoid large balances, your usage of credit cards likely will remain low.
FICO didn’t change how it weighs your credit history when preparing your score. The trended data is grouped into the following categories, and percentage or weight:
• Payment history – 35 percent.
• Amounts owed – 30 percent.
• Length of credit history – 15 percent.
• New credit and credit mix – 10 percent.
Benefits of FICO’s new scoring models
FICO Score 10 examines as much as two years of your credit history. So, if you want to be among those whose score will increase, you should start making permanent changes in your debt load and credit management habits now. The earlier you get serious about raising your credit score, the better off you will be under FICO 10.
Effects on mortgages
Mortgages will not be affected by FICO 10 scores immediately, because home loans guaranteed or backed by Fannie Mae and Freddie Mac, which include the vast majority of mortgages, are still required to use older versions of the FICO score. When the housing industry adopts the FICO 10 model, probably next year, homeowners and buyers who planned and changed their credit management habits in 2020 to comply with the changes in credit scoring will be ahead of the game. The first adopters will be Fannie Mae, Freddie Mac and the lenders who do business with them.
