Last month, FICO - the company that more than 90% of lenders rely on for calculating credit scores - announced that they will be releasing a new scoring formula which could impact nearly 110 million Americans.
Currently, your credit score is broken down like this:
- Payment History = 35%
This takes into consideration how often you make payments on time.
- Credit Utilization = 30%
This means how much of your available credit is being used. For example, if you’re using 90% of your total credit limit across all your credit and retail cards, your score would be lower. A general rule is to try to use less than 30% of your total available limit.
- Age of Credit History = 15%
This is how long you have had credit accounts open.
- Types of Credit = 10%
It’s generally better to show a healthy mix of credit - like mortgages, auto loans, credit card and retail accounts- that you have been paying as agreed.
- Amount of New Credit = 10%
If you’ve opened several lines of credit recently, this can make you look riskier, and lower your score.
So, what’s changing?
The biggest change is that the new score will look at your credit utilization and balance over the last two years, compared to the current model which just looks at your balances over the last 30 days.
So, what does that mean for my score?
If you have been consistent with your balances and utilization for a while, then you should see no major impact to your FICO score. However if you are using more and more credit - meaning your balances are growing and your utilization is going up and up, your score could potentially be impacted by up to 20 points. Conversely if your balances are high but over the last two years, you have been paying down your credit, you could see a boost in your score.
The Bottom Line
While most of us will see a slight bump up or down when the new model is adopted by lenders - which could take a while. The most important fact to remember is that a poor credit score can end up costing you thousands of dollars over your lifetime due to higher interest rates. Joe Brancucci, Financial Partners Credit Union’s Chief Lending Officer, offers these tips to keep your credit score healthy:
- Try to use only 30% of your total available credit. While the new model won’t scrutinize a high spending month here and there, the goal is to stay under the 30% mark over the long term.
- Take a look at debt consolidation loans. These loans help you take balances from higher interest rate credit cards and combine them into a lower interest loan - thereby reducing your utilization AND saving you money with a lower rate. This means you can pay off your debt faster and improve your score even more!
If you need help improving your credit score, reach out to our team. We will review your credit and help you design a plan to get your finances in focus. Stop by a branch or give us a call at 844.TRY.FPCU.