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How Will New FICO Scoring Affect You?

Bob Musinski

Your FICO credit score, which is used in lending decisions, could soon shift because of a new scoring model that will change how the scores are calculated.

This change could help your FICO score if you manage credit well, but it could hurt your score if you struggle to manage credit.

Try not to panic. Credit scores may not be affected by the new FICO formula until mid- to late 2020.

Also, lenders are usually slow to adopt new scoring models, says Gerri Detweiler, education director for Nav, which provides tools for business owners to manage their credit and access financing. Some may stick to older FICO scoring versions for a while or use VantageScore.

Here's more about the new FICO scoring model.

[Read: Best Balance Transfer Credit Cards.]

How Is FICO Changing the Way It Scores?

Fair Isaac Corp., the company that created the three-digit FICO score, will offer a scoring model with two components, FICO 10 and FICO 10 T, this summer to credit bureaus. This new version of its credit ratings is called FICO Score 10 Suite.

FICO 10 T will use two years' worth of so-called "trended data" to provide lenders more insight into how consumers manage credit. FICO 10 does not use trended data, but FICO 10 T does.

Trended data takes a historical view of balance and payment information to reveal how consumers use credit. The new FICO 10 T scoring model, for instance, can show whether consumers carry or pay off balances or consolidate debts.

"Trended data could show that you're paying all credit card balances on time, but over time, credit card balances have increased," Detweiler says. "It could also show that your credit card balances are high around the holiday season but at a lower utilization level the rest of the year."

The VantageScore 4.0 model also uses trended data.

"It's no secret that trended data is predictive," says John Ulzheimer, a credit expert who has worked at credit bureau Equifax and FICO. "It further underscores the importance of not carrying large balances on credit cards."

How Might Your FICO Score Change?

The change in your score will depend on your credit habits.

"One of the biggest changes with the FICO 10 is the emphasis on debt, especially loans, and on monitoring payment trends over the past two years," says Beverly Harzog, best-selling author, credit card expert and consumer finance analyst at U.S. News. "Some consumers will see a small increase in their scores, but some will also see a small drop in scores."

About 110 million consumers could see modest changes, if any, to their credit scores, according to FICO. But 40 million others could add more than 20 points to their scores, and the same number of people could see their scores drop by the same amount.

"Consumers with recent delinquency or high utilization are likely going to see a downward shift, and depending on the severity and recency of the delinquency, it could be significant," says Dave Shellenberger, vice president of product management at FICO.

Credit scores may not be affected for some time, though. Any shifts in scores could hinge not only on when credit bureaus start using the new FICO model but also on when lenders adopt it.

"Based on what we've seen in the past, it takes about two years for the majority of lenders to adopt a new score," Shellenberger says.

That said, lenders may opt to use older FICO models, even after a new one debuts. For instance, FICO's version 8 is the most widely used, even though version 9 from 2014 is more recent. And mortgage lenders favor versions 2, 4 and 5.

[Read: Best 0% APR Credit Cards.]

How Can You Prepare for the FICO 10 Suite?

A drop of 20 points or more in a FICO score ought to be a warning sign for consumers who carry a lot of debt.

FICO's new scoring process "certainly could affect consumers that are struggling and don't seem to be making headway with their credit," Detweiler says. "It looks like it might even be harder for them to raise their credit scores over time."

The new scoring model rewards a history of keeping balances low, making more than minimum payments and paying on time.

If you always pay the minimum amount on your credit card, you will benefit as you continue to pay your bill on time. Payment history is the most important factor in a FICO score, and that won't change.

But the new system could punish you if you have a history of carrying a balance. "If you have a lot of credit card balances, you need a strategy to pay them down as opposed to moving them around," Detweiler says.

Avoid moving credit card debt using balance transfers and then not paying them off.

Your FICO score is just one reason to pay off card balances as often as you can: You're "already being penalized in the form of paying interest," Ulzheimer says.

The FICO 10 Suite still relies on the key ingredients of a credit score, Shellenberger adds. Those include:

-- Payment history. This factor accounts for 35% of your score.

-- Credit use. The ratio of balances to credit limits on revolving credit accounts comprises 30% of your score.

-- Length of credit history. The age of accounts is 15% of your score.

-- Credit mix. The types of credit you have make up 10% of your score.

-- New credit. Credit inquiries also make up 10% of your score. Too many of the wrong kind of inquiries in a short span of time could hurt your score.

"Avoid delinquencies, don't excessively apply for credit and stay out of credit card debt," Ulzheimer adds.

[Read: Best Credit Cards for Good Credit.]

Will Debt Consolidation Hurt Your FICO Score?

With the new FICO scoring formula, an unsecured personal loan could either help or hurt your credit score, depending on how you handle your finances after getting the loan. Unsecured personal loans have grown in popularity recently.

An unsecured personal loan can boost a credit score when someone makes payments on time and pays down debt, Shellenberger says.

"With the incorporation of trended data in FICO Score 10 T, we are additionally able to capture the recent trajectory of a consumer's revolving debt," he says.

The data is designed to pinpoint the high-risk behavior of opening personal loans to consolidate debt and then charging up credit card balances again. If you're not adding more debt and you're paying off what you owe, the new FICO scoring model won't punish you.

"This is especially the case if the consumer otherwise would have no installment loan repayment experience," Shellenberger says.

Whether or not you are paying down a personal loan, good credit habits will always pay off.

"Consumers need to keep in mind that it takes time for lenders to start using a new score," Harzog says. "Just keep having good credit habits and your score will improve whichever version is used."

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