What Do The New FICO Score Changes Mean for You?

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FICO Launches New Credit Scoring Model (FICO 10): What does this mean for your mortgage qualification?
The short answer: Nothing. While the FICO 10 scoring model is being rolled out this year, most mortgage lenders will not utilize this version for qualification for some time. Read on for full details.
 
FICO 10 Credit Scoring Model
Just recently announced, FICO is launching a new scoring model coming summer of 2002. This new model is called FICO Score 10. It will take into account a consumer’s account balances and missed payments over the last two years.
 
With these new changes, many Americans will likely see their credit scores change this summer. The new approach now incorporates consumers’ debt levels, taking into account account balances for the previous 24-plus months, while prior FICO scores focused on more recent account balances.
 
Are you at Risk?
The newer model can put borrowers with late payments on their records at a disadvantage. In addition, consumers with a history of high utilization ratios (the amount of credit you use vs. what you have available) will also see their scores drop. However, for borrowers with already good credit, the new model will likely provide a boost. On loans and mortgages, it could even mean additional saved on interest and fees (again, when lenders start to use it)!
 
Overall, this scoring model is deemed to be more accurate. It is better for consumers because there’s many who aren’t getting the credit score, they deserve. For example, if someone has a 690 but really should have a 700, they’re missing out on lower fees and rates that they higher credit score would get them.
 
What Can You Do To Improve Your Credit Score?
  • Try to pay off your credit card balances early, even before their monthly due date.
  • If you are already a homeowner, stay on top of your monthly mortgage payments.
  • Reduce your spending where possible
Will Lenders Use This Model?
Lenders will most likely not see these scores in practice in the mortgage industry for several years to come. Currently Freddie Mac and Fannie Mae only approve one FICO score model and it is the one which was created in 2004.
 
New score models were created over the years including FICO® 8, FICO® 9 and FICO® 10. Until Fannie Mae and Freddie Mac approve the use of different models, lenders must use the model they deem appropriate/approve. Per FICO® - “Updates incorporated in new releases (FICO® Score 8, 9, etc.) do not impact the older models”.
 
Credit Basics Are Still Important
 
Payment History
The factors that FICO looks at to calculate your score overall aren’t changing with the new model. Payment history will still make up about 35% of FICO scores. So, paying your bills on time (and in full) remains crucial to getting a good score.
 
Total Amount You Owe
Around 30% of your FICO credit score is based on the total amount you currently owe, and that’s still true under FICO 10. Keep your balances as low as possible! Do not use more than 30% of your available limit with products like credit cards.
 
 
After the two factors mentioned above, the length of your credit history, your mix of loans and the new accounts you’ve applied for recently, remain important to calculating your credit score.
 
Checking Your Credit Score Online
When consumers go online and receive their scores’ they must review which scoring model they are receiving. Consumers could get a Vantage Score, a whole different scoring model. They most likely will get a FICO® model score but must verify the version. The difference in score versions provided can have a consumer find a variance of 30-90+ points from lender accessed scores. Keep in mind, Credit Karma uses Vantage, which can render significantly difference scores than used for mortgage qualification.
 
Online scores are good to gauge where your scores sit, but only a lender can provide the true FICO® lending score used for decision making. Scores are obtained when the credit bureau information from Experian, Equifax and Transunion is evaluated by the FICO® model score. This is a snapshot at the time the credit report is pulled. It is a lender guideline to use the middle score. For example, a 650 – 690 and 675 score would result in the middle score being a 675.
 
Bottom Line
Instead of getting hung up on which model a lender may use, it’s important to practice fundamental good habits such as paying bills on time and keeping your debt low. If you’re thinking about buying a home, get to know your credit score better and how to improve it! Learn more here
 
Give EHL a call to discuss your credit score in detail. There are many different ways we can help. 833-EHL-1234.
 
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