Fair Isaac recently announced a big change in how it determines its FICO credit scores. The new FICO 10 and FICO 10 T are making waves within the general population as well as the retirement community and are expected to take effect by year’s end.
Why worry about your credit score?
Your credit score tells a story; it is a window into your financial life. If these scores are strong, they can help you secure loans with low rates, low auto and homeowners insurance premiums, great deals on cell phone plans, and opportunities that those who have lower scores cannot. Not only does your score affect whether you can borrow money and at what rate, but it can also affect employment opportunities. Some employers check the credit of prospective new employees because they argue this data can be used to determine responsibility.
Having a strong credit score can not only help you obtain loans at favorable rates or be offered lower premiums but it can also enable you access to a rewards credit card making travel in retirement less expensive.
What are the effects of this change?
According to FICO, 40 million people could see their score drop by 20 points or more and another 40 million could see their score rise by 20 points or more. About 110 million people could see fluctuation of their score up or down by 20 points. What is causing this to happen? FICO 10 is placing more emphasis on a borrower’s rising debt levels. So, carrying large credit card balances is NOT in your best interest. FICO Score 10 T will include data patterns for the past 24 months for every borrower, to show the history of their credit behavior. This change will be beneficial for people who have been working to pay off their debts, but more than likely will cause people’s scores to drop if their debt levels have grown in that time.
Essentially, people who already have high FICO scores will fare even better under the new system and people who don’t pay lenders on time will suffer significant declines in their scores than under previous versions of FICO, as reported by the Wall Street Journal.
What can you do to protect or better your score?
- Make payments on time. Late payments will have a larger impact on your score than before.
- Be careful using personal loans to consolidate credit card debt, especially if you are still actively using credit cards to create additional balances.
- Pay your credit card off every month in full. Otherwise, you will see this new system isn’t as forgiving.
- Live within your means. Credit cards are not cash, and therefore should not be used as such. Try only charging what you know you can pay off the next month.
- Don’t apply for too much credit too often.
- Improve your credit utilization ratio (how much credit you’ve used versus how much lenders are willing to give you). This means making multiple payments throughout the month.
- Review your credit report at least annually and correct any errors you find by contacting the bureaus as well as the lender.
- Consider “Experian Boost.” This is a free service offered by the credit bureau that allows consumers to provide their cell phone and utility payment history. Many people have seen their score jump by 10 points as a result of this new option.
Not all lenders use the same FICO grading system. Some still operate under old FICO systems such as FICO 8 or 9. Scores will differ depending on which system is being used. Don’t get too concerned with which one is being applied in given situation. Instead, focus on the common sense, financially responsible habits outlined above. If you are making the smart choices and taking the appropriate steps, your score will improve regardless of which system is being used.
If you have questions or would like to start a conversation, please reach out to us at (410) 824-1853 or visit us at www.geierfinancial.com.
Sources: Motley Fool/ Forbes/MarketWatch/ CNBC
© Geier Asset Management, Inc. May 2020. Dan Mules, CPA is a Client Manager and Tax Planning Professional for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of May 2020 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.