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FICO recently announced huge changes to their latest credit scoring system, FICO Score 10. The new model will weigh heavier on consumer debt levels and personal loans. According to FICO, about 80 million people will see a shift of 20 points or more.

Most banks today are still using FICO 8 scoring system that was implemented in 2009. Below is a chart that illustrates what currently impacts your credit score.

The new FICO 10 system will roll out in Summer 2020, and most likely implemented in bank systems sometime in 2021.

How the FICO Score Changes Impact Your Credit Score

1. 24-Month Snapshot

The new FICO Score 10 will incorporate “trended data” for the past 24 months to see the historical credit behavior. A 24-month snapshot of credit behavior can be detrimental for those who don’t consistently pay off their debt.

On the other hand, if you show “good” credit behavior by paying off balances, then you’ll be rewarded with a higher score.

The idea is that instead of only seeing a one-month snapshot with the FICO 8 system, credit issuers can get a better idea of consumer behavior and de-risk.

2. Personal Loans

Life is unpredictable, and sometimes you need to take out a personal loan to cover unexpected expenses. I recommend paying off the personal loans as soon as possible.

The new FICO Score 10 system potentially “punishes” people who take out revolving loans.

Personal loans are typically broken into two categories, installment or revolving loans.

  • Installment loans = mortgage, car, and student loans
  • Revolving loans = credit cards and personal loans

Revolving loans will be weighed more heavily. One common scenario that credit issuers have faced is a consumer opening a credit card, and then taking out a personal loan to pay off the card. This can snowball into a cycle of debt.

If you’re someone playing the balance transfer game (I don’t recommend this), taking out a personal loan for a lower APR rate will dramatically lower your score. Most people who do this carry a balance on a credit card, transfer the balance to a new card that has a 12-month 0% APR promotion, and then pay off the card afterward.

With the 24-month snapshot, having a high balance on a credit card for 12 months looks like risky behavior.

How to Improve Your Credit Score

The good news is that the fundamentals of improving your credit score have stayed the same. The two high impact factors you can control are:

  • Credit Card Utilization (30%)
  • Payment History (35%)

Credit Card Utilization

Credit card utilization is how much available credit you use each month. I typically recommend keeping credit card utilization in the 1-5% range by pre-paying your bills.

Utilization = credit limit used / credit limit

If your total credit limit is $10,000 and you use $2,000, then utilization is 20%.

  • $2,000 used / $10,000 limit = 20% utilization

I recommend pre-paying $1,999 before the statement close date for the utilization snapshot to be low.

  • “$1 used” / $10,000 limit = ~1% utilization

For example:

  • A = Statement period: Dec 28-Jan 27
  • B = Statement closes: Jan 27
  • C = Payment is due: 15-25 days after B

Using the example above, if you spent $2,000 during Dec 28-Jan 20, you would pre-pay $1,999 by Jan 25, so your statement closes with a $1 balance on Jan 27. After Jan 27, pay off the $1 balance before the payment due date.

If you’re someone who can’t pay off the balance in full each month, I don’t recommend using credit cards. Carrying a balance each month will lower your score, especially with the new 24-month snapshot.

Payment History

Payment history is straight forward. Pay your bills on time, and you’ll be in a good spot. Missing one payment can put a dent in your credit score.

Payment history is calculated by on-time payments divided by total payments.

If you're new to credit and you miss a payment, then this will negatively impact your credit score.

  • 1 on-time payment / 2 total payments = 50%
  • 999 on-time payments / 1,000 total payments = 99.9%

Overall Thoughts

The fundamentals of how to maintain a good credit score remain the same: pay your bills on time, keep credit utilization low, and don’t take out personal loans unless you need to. Those who follow the simple guidelines are likely to see a score increase when the new FICO Score 10 is implemented.

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