How FICO Score 10 Affects You

When applying for a business loan, your credit score has an important role when determining the interest rate and terms you will receive and whether you will be approved or not. There is a huge change coming to credit scores that is going to affect millions of Americans in the upcoming year.

FICO is saying the new update will have a stronger predictive power and use more comprehensive data so lenders can make a more precise decision when lending. The changes to the FICO model will not affect your score significantly if you have good credit habits. They are taking a different approach to calculating scores by looking at longer credit repayment history and weighing debt in different ways. It is worthwhile to know what the changes are and how it will affect you so you know what you can do head of time.

What Is a FICO Score?

FICO establishes how creditworthy an individual is and assigns a score of a number between 300 and 850. Your FICO score plays a big role in any credit-related decisions you make in life and in business. A good credit score is a score above 670 and a score of 800 and higher is considered exceptional. Most banks want a credit score of 800 or higher when you apply for a loan but there are other alternatives if you score is lower than that.  

What You Need to Know About FICO 10

The new version of the FICO score called FICO 10 will weigh a consumer’s total debt and payment habits more heavily when calculating their score. Some types of debt will be riskier such as personal loans, which will hurt scores.

If you have any delinquencies on your credit reports then it will hurt your score even more under FICO 10. Delinquencies occur when you miss payments on your credit obligations. The best way to avoid this is by making all your payments on time.  

FICO 10 takes a look at how you pay your credit cards over time. It puts an emphasis on the amount of credit you are using compared to the credit that is available to you. If you pay off your balance in full each month then it will be good.

If you already have a good FICO score, you will have an even higher score under FICO 10. If you have a poor FICO score, you will likely have an even slower score under FICO 10. The range of the scores will remain the same as previously which are 300 to 950.

If your credit report does not qualify for a FICO score, then it will not qualify under FICO 10 either. There are specific standards that you must meet to be considered “scoreable” under FICO credit scoring models.

How to Avoid a Negative Effect on Your Score

If you think your score will be negatively affected with the new change, there are certain ways to avoid that. Below are ways you can start to prepare now.

  • If you have any high balances, start to pay them down. A high balance will have more of an impact now with the new change in place.
  • Be sure to pay your balances frequently so you can keep them low. Either make smaller payments more frequently or keep your overall spending low.
  • Start an emergency fund to cover any unexpected expenses.
  • Avoid building high balances after you have paid off debt with a personal loan since personal loans will now be looked more into with the new change. Explore other options other than a personal loan and make sure to avoid having debt.
  • Correct any errors you find on your credit report and resolve them as quickly as you can. To resolve any errors you can contact the lender and the credit bureaus.

The Bottom Line

To have the best FICO score possible, paying bills on time and maintaining low credit card balances will help drastically. The same goes for getting a good FICO 10 score as they now will consider credit data and see your credit card balances for each month. Any high balances, revolving debt and late payments are now going to be scrutinized. In the end, lenders will consider the previous model and/or your FICO 10 score to determine whether you are approved for a loan or not.