Fair Issac and Co., the company that created the Fico score, announced in a recent press release that they will make available their newest scoring model Fico 10 this upcoming summer.
Your Fico score is one of the most important assets you have in your financial life. Therefore, when Fico makes changes to the scoring model it’s always big news! Fico estimates that over 80 million consumers will see more than a 20 point change to their credit score in either direction with the new Fico 10 scoring model! In this post, we will discuss what Fico claims to be changing with the new model so you can know what to expect once the score is released.
The big change will be Trended Data. Until now, no Fico score calculated trended data as part of the scoring model. With the new Fico 10T, trended data will be included.
What Is Trended Data?
Trended data gives lenders the full balance picture from the last 24 months, rather than just the last month’s data.
For example, Let’s say, you maxed out your credit cards and then slowly started to climb out of the debt. For the last 6 months, your debt started to fall from month to month, and you’re currently only 60 percent maxed out. Your credit utilization will be currently at 60%, but it’s trending downwards.
Your friend has lately gotten a terrible shopping habit, and over the last six months is slowly building up extreme balances. He/she is currently hitting 60% utilization on all his/her credit cards. His/her credit utilization is the same 60% as yours, but the difference is that s/he is trending upwards.
Now when you both apply for a new credit card, who is a more risky borrower? You or your friend? The answer is most likely your friend. That is because you are slowly climbing out of the mud, but your friend is currently sinking into the mud…..
With the current Fico scoring models, you and your friend will score the same, since you’re both at 60% utilization. With trended data, this will change. Fico 10T will not only look at the current utilization. It will look back at your balance history and summarize you’re activity of the last 24 months as well.
Why It Matters
The fact that Fico did not calculate trended data in the current scoring models has many times been to the advantage of the consumer. Even if a consumer had a big purchase once or twice, or for whatever reason needed to max out their credit cards, as long as that balance was paid up before applying for a mortgage or credit card, etc., there were no problems. Fico only calculated the current balance. But with the new Fico 10T scoring model, high balances may affect you for a full 24 months! For many consumers, this will make it take much longer for them to put their dirty deeds passed behind them.
With the new FICO 10 scoring model, personal loans will be viewed as a negative factor at least in cases where the consumer continues to accumulate credit card debt after obtaining the payoff loan.
Nothing Is Happening So Fast
Even if Fico is already releasing the new scoring model this summer, let’s remember that lenders do not adapt to the new models so fast. The previous scoring model, Fico 09, which was already released in 2014, is still not in use by most lenders. And when it comes to mortgages, the even older Fico 04 model is still in use. So as things are trending, you can still live a nice amount of healthy years before these changes have any effect on your financial life.
If you’ve got any questions about the new Fico 10/fico 10T model or about anything discussed in this post, please leave a comment and I will respond.