New York Estate Planning & Elder Law Blog
Millions of Americans are expected to experience a drop in their FICO score when the Fair Isaac Corporation, the company that invented the FICO score, modifies the methodology they use to determine a consumer’s FICO score. Beginning in the summer of 2020, lenders may opt to use the new methodology when assessing the creditworthiness of a consumer when extending credit and setting interest rates on mortgages and consumer loans, such as credit card or automobile loans.
Link between consumer behavior and your FICO score
Consumers with fair credit, growing debt, who take out personal loans to consolidate debt, or who are about to max out their credit cards are expected to see a negative impact to their FICO credit score. The Fair Isaac Corporation updates its scoring model every few years. The last time significant changes were implemented was in 2014, where it was thought that credit restrictions were lessoned. For individuals with little to no credit, utility payment histories, rental payment histories, and the elimination of civil judgments from individual’s credit histories, helped bolster their credit score.
David Shellenberger, FICO’s vice president of product management and scores, announced via a statement earlier this week that “most consumers will see less than a 20-point swing in either direction.” Consumers with scores below 600, a history of defaults, and other black marks on their credit report are most likely to suffer declines. Other consumers, however, could see their FICO scores rise. Consumers with high FICO scores of 680 or higher who continue to make loan payments or pay credit card bills on time will likely get ever higher scores.
The FICO scoring model is closely tied to consumer behavior. As consumer behavior changes, so does the methodology used to determine the consumer’s credit score. The company announced that surging consumer debt and the popularity of personal loans created an atmosphere of uncertainty about the creditworthiness of consumers.
As soon as the summer of 2020 lenders may begin to use the new FICO rating system. The new system is available to lenders through the credit reporting agencies. Credit histories are maintained by the three credit reporting agencies, Equifax, TransUnion, and Experian. Moving forward the following behaviors will start negatively impacting your credit score:
- Missing a payments on loans, credit card bills, and other types of debt — particularly in the last 12 months;
- Having debt balances that have risen over the last two years;
- Using personal loans; and
- Having a high “credit utilization ratio;” the amount you’ve borrowed compared to your credit limit.