The previous scoring models took snapshots of a person’s payment history. The new model will have a historical view of payments over time and can process much more information, including account balances from the previous two years, with the aim of giving lenders more information on how people manage their credit, said FICO.
About 80 million people will see a change of 20 points or more, according to a statement from Dave Shellenberger, vice president of product management at FICO. Of them, approximately half will see the scores rise, while the other half will see their scores fall.
Those who have a large amount of credit card debt in relation to their general credit, or who have recently lost payments, could see a more significant fall.
But people who make payments on time and don’t have high balances will likely see a slight increase in their score, Shellenberger said.
With a broader view of payments, consumers who pay their credit cards monthly will not be penalized for both large single purchases and occasional high balances. But those who constantly maintain a balance will see a drop in their credit score. Paying credit cards monthly will always result in a better score.
FICO estimates that 110 million additional consumers will see only a modest change to qualify, if they do, he said.
“The bad news is that those who were already struggling with debt will be more drastically affected by recent FICO changes,” said Sefa Mawuli, equity advisor at Citrine Capital.
“However, the good news is that the fundamentals we emphasize have not changed: make payments on time, avoid taking on too much debt. Those who meet these guidelines will not see their credit scores fall under the changes,” he said.
The new model targets personal loans, potentially penalizing those who use them, said Justin Pritchard, a certified financial planner and author of “The Everything Improve your credit book: increase your score, lower your interest rates and save money.”
“We have seen numerous personal loan providers enter the market in recent years, so it is not surprising that these debts are increasing,” he said. “People can borrow money online at competitive rates.”
The new changes will take effect this summer.
Meanwhile, Pritchard said, the basics of maintaining a good credit score still apply: pay off debts on time, keep balances low on credit cards and not get more credit than you need.