What the new version of the FICO score means for you

Library | 2/11/2020



 
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By now you may have heard about the changes FICO® is making to how it calculates its popular FICO score. And if you haven’t heard, you may have noticed a recent change in your FICO score (either good or bad) on some of the accounts you have that provide you with a free FICO Score service. That’s because FICO recently release a new version of its score called FICO Score 10, and it will immediately impact the scores of more than 80 million people.

   

Checking your FICO score today is easier than ever before. Because of that easy access, most of us rely on that score to make important plans and financial decisions, like to buy a car or a home. Now at Valley, we’re currently not relying on the new FICO Score 10 to make these important lending decisions for you. There is more that we evaluate, which I’ll get into a bit later. But, if you’re worried about what this change means to you and what you have planned for 2020, let me explain what the FICO changes are and why you shouldn’t let this change hamper your financial decisions.

  

What is FICO Score 10?

FICO Score 10 will now determine your monthly FICO Score by looking back at your financial habits over the past 24 months. Previously, your score was determined by just a present-day snapshot of your financial behavior. That means, with this change, you could see a decrease in your score if, for instance, you’ve used a personal loan to consolidate credit card debt but have since built up new credit card balances. Or, if you’re someone who only racks up a high credit card balance over the holidays but immediately pays it off, your score likely won’t be impacted because the new system is now looking at historical data.

  
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How does it impact your chances of getting a loan?

If you’re someone who is looking to buy a home, for example, and are worried this could impact your ability to get approved or get a good interest rate, it’s important to talk with a home loan consultant. They will explain that there are actually a number of factors that go into the mortgage process, including the fact that we don’t rely on your FICO score to make decisions on your application, but rather the credit scores from the independent credit agencies (Equifax, TransUnion, and Experian). Those three scores are more closely looked at when determining your eligibility for a loan (whether it’s an auto or home loan) and the type of interest rate you qualify for. That’s why it’s always a good idea to request a credit report each agency before applying for a loan.

  

What should you do going forward?

If you’re one of the millions of people who are concerned about this change, you can mediate the impact to your FICO score by making sure you pay your bills on time, keeping your credit card balances low or paying them off every month, and trying not to apply for credit you don’t really need.

  

These habits will do you good going forward, but it won’t change the past 24 months. I get that. That’s why it’s also important to talk with a financial expert before you consider abandoning your plans of buying that new car, applying for that rewards credit card, or purchasing a new home. This change to how FICO calculates its score may be shocking at first, but over time it will actually give you a clearer picture of your financial behavior and make you even more prepared to make important financial decisions.


 
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