What You Need to Know About the New FICO Score Changes

By Erica Gellerman
March 12, 2020

Your credit score is a three-digit number that heavily impacts your financial life. For example, if you want to upgrade from a debit card to a credit card or take out a home loan, your credit score will determine whether you get approved, and at what interest rate. 

Yet, that credit score is about to change. FICO plans to roll out new scores during the summer: FICO 10 and FICO 10T. With household debt at an all-time high, the aim of these new scores is to give lenders better predictive abilities to determine if potential borrowers pose a risk of defaulting on loans

Since your FICO score plays such an important part in your financial life, it’s a good idea to know just what’s changing and how it may impact you. Read on to learn more. 

What is a FICO Score?

Lenders want to make the best decisions about loaning money. Your credit history helps them determine whether you’ve paid off past debts on-time and if you carry a lot of debt. 

A FICO score is calculated using your credit history. FICO isn’t the only credit scoring agency, but these scores are the most widely used. And, there isn’t just one type of FICO score. Previous versions include FICO 8 and FICO 9, both of which are still being used. There are also product-specific FICO scores. For example, if you apply for an auto loan, your lender will likely use a FICO Auto Score. If you apply for a credit card, your FICO Bankcard Score will probably be used. 

FICO 10 and 10T are going to be the newest additions. 

What Factors go into a FICO Credit Score?

Before we talk about the changes coming, let’s break down exactly what goes into your FICO score calculation. 

FICO takes the information that is reported to the credit bureaus — your credit history — and creates a score that shows your creditworthiness. The exact calculation isn’t shared, but there are five main factors it considers when calculating your credit score:

  1. Your payment history is the largest component of your FICO score. Have you done a good job repaying your debt in the past? If you’ve made on-time payments, a lender may feel more comfortable that you’ll continue making payments in the future. 
  2. The amount you owe. Is your credit maxed out? Do you have a large credit limit but very little debt outstanding? A FICO score includes how much you owe vs. how much you are able to borrow (also known as your credit limit). 
  3. Length of your credit history. The longer you’ve been effectively managing your credit, the better off you’ll be when it comes to your FICO score. 
  4. What does your credit mix look like? Do you have a mortgage, a car loan, and a credit card? FICO scores take into account your available credit as well as the type of credit you have. This isn’t a major contributor to your score calculation, but it will be included. 
  5. Do you have new credit? Opening a number of new credit accounts within a short period of time can hurt your credit score. Why? Lenders may worry you’re taking on a lot of debt because you’re about to experience financial troubles.

What’s Changing? FICO 9 vs FICO 10

The last time FICO changed their scoring model was back in 2014 with the introduction of FICO 9. That scoring model included rent payments (where available) in the calculation. It also put less emphasis on medical debt and disregarded collections payments that were fully paid off. 

Now that we’re looking at FICO 10 and FICO 10T, there are additional changes that we can expect to see. 

The biggest change is that FICO 10T will now use 24 months of trended data in your score calculation. This trended data can show how you’ve managed your accounts over the past 24 months. With the current FICO scoring model, potential lenders can see how much debt you have outstanding, but they don’t know whether your outstanding debt has been increasing or decreasing over time. 

For example, do you carry a balance every month on your credit card, or pay it off? Trended data will show whether you carry a balance every month and whether you are increasing or decreasing your debt balance over time. And, your debt trend will now impact your FICO score.

There will also be other changes, like potentially penalizing people who carry both personal loans and credit card debt, or those with high credit utilization for a long period of time. 

How Does this Impact You?

According to The New York Times, FICO estimates that 110 million people will see their score change by less than 20 points and 80 million people will see their score change by more than 20 points – in either direction. 

But even if your score changes, you may not notice the impact. Remember, there are a number of different FICO scores that are used, so lenders may not make an immediate jump to the FICO 10 score. 

Bottom Line

These FICO changes serve as a reminder, and possibly as a warning: Stretching yourself thin with debt is not a wise financial move. 

It’s important to not assume too much debt and to keep up with your current monthly payments. It’s also a smart move to open up a savings account and begin making automatic payments monthly. This way you aren’t always reaching for a credit card.

Learn More

Now that you know what FICO changes are coming, it’s a good reminder to work on improving your credit score. These articles can help you get started. Happy reading!

Credit Score Ranges: Where do You Stand?

How to Improve Your Credit Score in 7 Steps

Chime’s Ultimate Guide to Building Credit

7 Things You Didn’t Know Could Impact Your Credit

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Erica Gellerman is a CPA, MBA, personal finance writer, and creator of TheWorthProject.co. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom, and Lifehacker.

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