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How the New FICO Scoring Will Impact You

Fair Isaac Corporation, the company in charge of producing the FICO credit score range, is about to change the way they calculate credit scores for millions of Americans. The FICO credit score is very important, as it determines your financial capability to purchase high-expense items, such as, a car, home or apartment.

Approximately, every five years, FICO determines if they need to update the way they determine credit scores. Financial experts, such as, The Wall Street Journal, are reporting that the new score will impact those with personal loans who have habitually fallen behind on payments. FICO also announced the inclusion of 10 T, a product that will focus on a person’s trending debt over time.

People take out personal loans for various reasons, such as, student loan debt or to consolidate credit card debt, to achieve lower interest rates. FICO will now be determining whether millions of Americans are using these personal loans responsibly.

With the old FICO scoring system, if you paid off your credit cards with a personal loan, your credit score would rise. Now, FICO will audit your personal loans and decipher your repayment trends to determine whether you are actively paying down your debts or falling deeper into debt. With this new scoring system, FICO will be able to detect if you are more of a risk than previously considered.

This is great news for home buyers with a healthy financial status and most notably, it will give lenders advanced information, so they can extend credit to risk averse borrowers at reduced rates.

In the meantime, here are some steps you can take to make sure your credit score is in optimal condition:

  1. Don’t make late payments.
    Paying each debt off in a timely manner is mandatory. Late payments will decrease your credit score, cause you to rack up late fees, raise interest rates and will show up on your credit report. This determines your ability to receive a new card in the future, or worse, will establish you as a risk to lenders.
  2. Establish credit history.
    Do not close your old credit card accounts. Unless the credit card charges an astronomical annual fee, you should leave it open. An older credit card can help you build credit history and raise your credit score if the history is positive.
  3. Don’t exceed your credit utilization ratio.
    Using more than a third of your available credit across all your credit cards can negatively impact your credit score. Instead, track your credit utilization with a financial app on your mobile device.

Sources:

www.npr.com

www.forbes.com

www.wsj.com