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And that brings us to the new FICO 10 Scoring Method:
The biggest change is that FICO 10 will be able to look into your spending habits for the last 24 months and determine, from that information, if you’re a risky borrower. The most notable of this is that they’ll be able to see if your spending habits have been steadily INCREASING, if your account balances are getting higher every month, or how often you’ve been maxing out your accounts.
Second, the new FICO scoring method will be able to see if your credit usage is INCREASING over time.
This new scoring method will weigh personal loans much more heavily, and that would likely bring down your score. This new scoring method will also be able to calculate if your debt is INCREASING over time, or if the amounts owed are steadily going up - and lenders would be able to take that into consideration to determine whether or not you’re a potential risk.
Third, on a GOOD note, FICO actually made an IMPROVEMENT to the credit scoring system, and they won’t be penalizing you for TEMPORARILY maxing out your account or holding a one time high balance.
They’re going to analyze the last 24 months of your account history, and any sudden “blips” of high spending won’t count against you, like if you had a big one-time purchases, or happened to make a lot of charges around a single time .
Now, in terms of what you could do about it:
FIRST: Always pay off your credit cards in full by the time they’re due.
Nothing changes here - I’ve been saying this before, and I’ll continue saying it - credit cards should not be seen as a way to borrow money. Instead, you should always opt to put normal spending on the card and use credit as a buffer between your spending, and your actual money.
SECOND: Don’t be afraid to take out MORE CREDIT
I know this sounds completely counter-intuitive…but, when lenders want to see a consistently small outstanding account balance - it HELPS to have more credit available to you, even if you aren’t using it. This is because, like I mentioned, 30% of your credit score is calculated from “amounts owed,” which is your utilization rate…and the higher the percentage is, the lower your score.
AND THIRD: I think this goes without saying…don’t take out personal loans and then rack up more debt on credit cards.
This is a surefire way for your score to take a dramatic hit, even if you’re doing it to consolidate high interest rate debt…do that responsibly, without taking on MORE debt afterwards.
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