FICO (originally called Fair Isaac Corporation) is the company that created the nation’s largest credit scoring system. They are changing the formula that has become the standard for consumer lending, and it could affect your credit score.

The changes are designed to more accurately reflect your overall financial and risk profile over an extended period, rather than provide a short-term snapshot, as it does now.

These changes, which will take effect this summer, will impact the scores of about 80 million consumers. The company says about half will see an increase in their score, and half will see a drop.

FICO scores range from 350 to 800. They expect that individuals who have a high score of 680 or above will likely see their score go up, while those with weak scores of 600 or below are likely to get even lower scores. Unfortunately, lower scores could make it harder and more expensive to obtain a loan or get approved for a new lease.

There are plenty of nuances, however, and it is important to understand the factors that FICO uses to evaluate your creditworthiness.

Credit scores have been inching higher in recent years, reflecting the strong economy as well as the fact that the damage done from the Great Recession of 2008-2009 has started to fall off of our credit histories. For the most part, your credit score looks back over seven years, so a bankruptcy or missed payments from 2012 no longer reflect in your score.

Moody’s Analytics reports that late payment rates are at their lowest level since 2005. While the long-running economic expansion has reduced the number of people who are defaulting on loan payments, consumers continue to run up record amounts of debt. Household debt jumped by $601 billion in the fourth quarter of 2019 to an all-time high of more than $14 trillion. Overall, household debt is now 26.8% above the low reached in the second quarter of 2013. Some analysts say the FICO changes could reflect a decline in businesses’ confidence in the economy and could help shield lenders from big losses should the economy sour.  

The new FICO scoring system places greater weight on recently missed payments and delinquencies. If you’ve remained current on loan payments over the past year, your score is likely to stay the same or improve.

But your credit score could get dinged if your debt levels have increased significantly over the past year or so. This won’t hurt you if you ran up high credit card bills over the December holidays but paid off those bills quickly. Instead, it imposes a penalty on consumers who increase what is known as the “utilization rate,” where your debt total climbs closer to your maximum limits and stays there for a sustained period.

The new FICO scoring system attempts to take a longer-term look at how you manage your credit, placing greater emphasis over what you’ve done over the past two years or so. Because it puts more weight on recently missed payments, it will be harder to do a quick-fix to your credit history right before you apply for a loan.  Consumers used to be able to get a quick credit score boost by paying off their loans suddenly. That tactic may not have as much impact under the new scoring system.

It also won’t help to transfer your credit card debt into a personal loan, while at the same time, you continue to ring up higher and higher credit card debt.

Even with the FICO changes, the traditional advice about managing your finances and your debt still holds: make payments on time, maintain control of your credit card balances, and avoid taking on too much debt.

By the way, your FICO score usually does not affect your application for a mortgage. It’s also worth noting that not all lenders will immediately adopt the new credit scoring system. Some will continue to use the older matrix, at least in the short-term.

We continue to advise everyone to check their FICO scores regularly at each of the big three credit reporting companies: Equifax, TransUnion, and Experian.  You can do so for free by using the authorized website annualcreditreport.com. Upon review, promptly correct any errors you find.

While some people prefer to review all three reports once each year, we recommend spreading the requests out for a more reliable picture.