The changes do not mean an instant drop in your credit score
Much has been made recently about upcoming changes to the FICO models or “scores” that are scheduled to go into effect this summer and how they will impact consumers. Many of the headlines make it seem as though nearly everyone’s score will go down and it will become more difficult to secure credit. This isn’t necessarily the case, however.
What goes into your FICO score
Today, your FICO score is based on several elements:
• 35 percent comes from how often you make on-time payments and how frequently you’re late.
• 30 percent comes from credit utilization, which is the percentage of credit you’re using that’s available to you. In general, the FICO formula prefers to not see you using all of your available credit.
• 15 percent comes from the age of your credit history – i.e. how long your credit accounts have been open.
• 10 percent comes from your credit mix. This refers to the types of credit you have, whether it’s bank-issued cards, auto loans, mortgages, etc. The FICO formula generally likes to see a mix of credit and not one specific type.
• 10 percent comes from how much new credit you have or have inquired about. If you suddenly have begun opening a number of new credit lines, this could be a red flag.
The new version is more like a movie
The newest FICO release, called 10-T (the T stands for trended data), can be thought of as capturing your credit usage more like a short movie than a snapshot in time.
For example, say you use the majority of credit available to you each month, but pay it all off the day it’s due on the 5th of the following month. If you applied for credit on the 30th of any given month, an older version of FICO might flag up that you use most of your credit without noting that you pay it off in full every cycle, as it only pulls data from the day you submit your application. FICO 10-T, on the other hand, looks back to the past 24 months of activity, and will see you responsibly pay off your debts each month.
On the flip side, if you’ve continuously consolidated your debts into a personal loan through fintechs or a similar service, FICO 10-T will see this too, and this could make obtaining credit somewhat more challenging. FICO 10-T also examines some factors that help it predict upcoming changes in financial situation, such as when student loan payments might start becoming due or increase.
Not all lenders use the same FICO scoring release
Just because there is a new FICO scoring system doesn’t mean all lenders will adopt it right away – or at all. The most current FICO system release is version nine, and while some lenders operate using that system, others still use older versions.
Not all lenders use FICO at all
There are other alternatives to FICO scores, one such score called VantageScore, is becoming a more popular measurement tool for lenders when evaluating applicants’ credit. VantageScore is a model developed by the three primary credit bureaus (Trans Union, Experian and Equifax). VantageScore 4.0, which is the most current score on the market was released in 2019, and already contained the trended data technology.
There are some notable differences between the two, however. VantageScore only requires as little as one month of credit history to develop a score, compared to FICO, which requires at least six months of credit history with recent activity. In addition, VantageScore considers data such as rent, utility and phone billing information, if that information is already contained in your credit report to help develop a credit profile for applicants, while FICO currently does not. For these reasons, VantageScore can be more advantageous for those new to credit such as college students or recent immigrants.
Lenders, especially larger banks and credit card issuers, are increasingly using the VantageScore to evaluate consumer credit. According to a recent study by VantageScore, use of their credit score increased by 20 percent between 2017 and 2018, and by 300 percent between 2013 and 2018.
The bottom line – there are a variety of scores lenders use to evaluate consumers’ credit profiles. The newest FICO scoring release is just the most recent development in a somewhat crowded space that is likely to continue evolving.
Jim Caniglia, is the senior vice president/consumer credit risk director at UMB Bank