Your credit score dictates so much about your personal financial situation these days, influencing those fast-rising credit card interest rates, mortgage rates, insurance payments, and even if you can get that dream job.
For that reason, you’ve been a great steward of your credit, responsibly doing the things necessary to maintain a good score.
You even pull your credit report once a quarter to look for errors or that dreaded financial fraud or ID theft.
In fact, as a nation, we’ve achieved a record high average national FICO score of 703 this year!
However, despite your best efforts and careful maintenance, your FICO score may be dropping soon…by as much as 20 points!
Don’t panic – Blue Water Credit is here to explain it all and guide you back to an optimal score.
So, here’s the bad news: Your credit score could drop by up to 20 points as a result of the new FICO 10T scoring model, which is due to be implemented soon. The big change from most FICO scoring models is that FICO 10 takes into account your previous debt and balances, not just your current debts and payments.
For many people who typically carry credit card debt (which is most of us), FICO 10’s new scoring system could have a negative impact on your credit score – dropping it by as much as 20 points for some consumers.
According to Fair Isaac Corp. (better known as FICO), their FICO 10 model will be available later this summer. Of course, Fair Isaac is the company that developed the FICO score, and it is predicted that this would result in changes to some credit scores of about 20 points.
FICO 10 will look at consumer account balances over the preceding 24 months or longer (not just right now) when determining a person’s credit score.
For those who typically carry credit card balances from month to month, not paying off their balance in full, FICO 10 brings bad news. As a result of the new scoring model, your past balances will now factor into your current score, sinking it by up to 20 points for many consumers.
According to research by the Consumer Financial Protection Bureau (CFPB), nearly half of us – 47% of consumers – carry balances from month to month, opting not to pay off credit card debt in full. And those people who carry debt have an average of $4,773.
With credit card rates on the rapid rise (just as mortgage rates), the average credit card interest rate is now north of 21%! Taking into account that average $4,773 balance, that means the typical credit card holder will pay over $1,000 a year just in interest!
But not paying off your credit cards in full will soon hurt your finances in other ways – your credit score.
As a result of FICO 10, experts see the gap between people with high credit (scores between 670 and 739) and those with poor credit (scores below 580) will expand. Of course, much of the difference between those two groups is the habit of paying down or off credit cards, not carrying balances month to month.
According to FICO, when the new scoring model goes into effect later this summer of 2023, close to 110 million consumers will see adjustments in their credit ratings. About 40 million of them will see their scores rise by more than 20 points (since they aren’t typically carrying debt month to month), while another 40 million will see their scores fall by up to 20 points due to bad credit card management. (The rest won’t see significant changes in their credit scores.)
In spite of the looming drop in scores for a potential 40 million consumers, FICO’s new scoring model, FICO 10, is not meant to hurt or punish consumers in any way.
As credit scoring specialist John Ulzheimer explains, “Newer models will assign higher ratings to persons with strong credit and lower scores to those with greater risk. When comparing score distributions between more recent and older models, this is a common result.
So, remember there’s a silver lining to FICO 10 – you may be able to increase your credit score by 20 points, too. For those people who are good stewards of their finances (by paying off their balances and NOT carrying high debt month to month), the potential for a double-digit credit score increase is real.
It’s recommended that you pay down your credit card balances to below 10% of your total available debt or so, a practice that may be more important than ever thanks to the new FICO Score 10T.
As always, if you want to know how to optimize your credit score or even give it a big boost in advance of applying for a mortgage or shopping for a loan, contact Blue Water Credit!