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Fair Isaac Corporation, the name behind FICO, is the oldest and most well-known credit reporting agency and they’ve changed the way they calculate your credit score. In 2020, FICO released Suite 10, and depending on how you manage your credit, the new methodology could change the way banks view your creditworthiness.

Why Is FICO Changing?

Credit rating agencies typically update their scoring formulas every few years to allow for new technology and new methods of data collection. The last upgrade to FICO score calculations occurred in 2014. Before that, they upgraded in 2009. Interestingly, many banks choose to use the 2009 model to avoid the cost of upgrading, so it’s possible that your current credit score is based in part on a methodology that is more than ten years old.

How is FICO Changing?

Since 2014, FICO calculates your credit score by weighing your credit history into five categories to comprise a total score of 300-850: Payment history (35%), balances owed (30%), credit history length, (15%), new credit (10%), and credit mix (10%).

The formula for computing your FICO 10 won’t change too much from FICO 9 calculations, but FICO 10 will consider your credit usage over a period of 24 months rather than just showing the 30-day snapshot that FICO 9 shows. This means that the combination of your personal loans and credit card debt can potentially cause a dramatic drop in your total score.

What Does This Mean To You?

While exact formulas used to calculate credit scores are proprietary, it’s estimated that FICO 10 gives more weight to higher or rising levels of debt and late payments. These data points will be easily accessible when viewing trended data over a 24 month period rather than a 30 day period. If you’re maxing out your credit cards and then taking several years to pay them off, it’s going to show in the new scoring model. Conversely, paying off your debt as quickly as possible and not utilizing every dollar of your available credit will reward you with a higher FICO score.

What You Can Do

As always, stay on top of your credit! Pull your credit reports annually and start correcting errors and managing your credit usage and try to improve your payment history.

  • Check your credit report at com. Check your report at least once per year. It won’t show you your credit score, but it shows your credit history and you’ll be able to see what creditors see when they check your credit. Address any errors you find on your report and then start trying to improve by paying off balances.
  • Don’t be late on payments. Paying your bills on time has the biggest impact on your credit score.
  • Stop maxing out your credit cards. Aim for keeping your debt less than 30% of your credit limit for each credit card.
  • Apply for only the credit that you need. It may make you feel good when a company offers you a credit card, but if you open a lot of credit during a short period of time, it may appear that your financial circumstances have changed in a negative way and that may make lenders wary of your credit-worthiness.
  • Actively work at improving your credit history. Loans are part of our financial world and they’re not harmful to you as long as you are mindful of usage and balances and paying your loans on time.

The Bottom Line

The fundamentals of building and maintaining good credit haven’t changed. Be vigilant of payment history and balances. Close accounts that you’re not using. It’s okay to shop for better interest rates but sit on those cards and pay down balances before shopping around again.

Remember that your credit history is just that: A glimpse of your past. Small changes now will reward you with big benefits over time. You have control of your future, so start making changes today and build for a better credit future.