Roughly 40 million Americans are likely to see their credit scores drop by 20 points or more. An equal number should go up by as much. courtneyk/Getty Images hide caption
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Roughly 40 million Americans are likely to see their credit scores drop by 20 points or more. An equal number should go up by as much.
courtneyk/Getty Images
Your credit score can determine whether you can buy a car, get certain jobs or rent an apartment. It's a big deal. And so is this: Credit scores for many Americans are about to change — even if they don't do anything.
The changes will be extensive. About 40 million Americans are likely to see their credit scores drop by 20 points or more, and an equal number should go up by as much, according to Joanne Gaskin, vice president of scores and analytics at FICO, the company at the heart of the credit scoring system.
Every five years or so, FICO updates the way it determines credit scores. This time, the biggest change is in how it treats personal loans, Gaskin says.
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Personal loans are growing faster than any other consumer debt category; Americans owe more than $300 billion on them. There are all kinds of personal loan offers in the mail, online and on TV. Many promise to lower your interest rate by consolidating credit card debt into a single loan.
For the first time, Gaskin says, FICO is breaking out personal loans as a distinct category to determine whether borrowers use them responsibly.
Why does that matter?
Let's say you pay off all your credit cards with a personal loan. Under the old system, your credit score might go up. But under the new approach, FICO will look back over a period of time — as far as two years — to see whether you've used the loan to reduce your high-interest credit card debt or whether you're using plastic as much as before, running up new revolving balances and falling deeper into debt.
"What we find is that potentially that consumer's credit file carries more risk than what was apparent," Gaskin says.
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If your finances are in good shape and you already have a good credit score, you're likely to see your score improve, she says. But Gaskin says those whose scores will decline are typically people in the lower FICO score range, about 580 and below. (FICO scores range from 300 to 850.)
That's not good news for people who are struggling financially, says Marisabel Torres with the Center for Responsible Lending. "It sounds like we're penalizing people for getting into a bad situation."
Torres says people who already have low scores are most likely to see their scores go even lower — and that will worsen inequities in the credit system. With personal loans, people with good credit can qualify for good terms. But Torres says predatory lenders charge people with lower incomes very high interest rates.
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"A lot of the predatory products concentrate these offers in lower-income neighborhoods, targeting communities of color especially who tend to have the more limited options for financing and for credit," Torres says. "They end up getting ensnared and into this cyclical debt."
She says it doesn't seem fair that now, on top of that, many will be getting hit with a lower credit score than they would have before.
With some loans, especially home mortgages, lenders tend to use older versions of the FICO score, so the new version won't have an impact on all types of lending.
Gaskin says the goal with FICO's newest score is to give lenders better information so they can extend credit to more borrowers at better rates.
While you can't control the way the scoring system works, there are steps you can take to improve your creditworthiness. "Don't make late payments on a regular basis," says Sara Rathner of the personal finance site NerdWallet. "Pay all of your debt obligations on time every month. That's huge."
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Rathner says one thing a lot of people don't realize is that it's often unwise to close older credit card accounts. "So many people think about 'cleaning up their credit' as as like Marie Kondo-ing their wallet," she says.
But Rathner notes that when it comes to credit cards, it can help to hold on to older accounts for a long time. Doing that gives consumers a more established credit history.
If an older card is charging you an annual fee, Rathner says, you can often get the issuer to switch to a card with no fee, while still keeping the extended credit history intact.
She offers another tip: Don't use more than a third of your available credit on all your credit cards. If you exceed that threshold, it can hurt your credit score.
FAQs
New FICO® Scores Explained
With these new models, you will have to pay closer attention to your late payments and revolving debt since these factors will have a greater impact on your new score. Additionally, these models will consider your credit card payment amounts and balance history.
How to raise your credit score 200 points in 30 days? ›
How to Raise your Credit Score by 200 Points in 30 Days?
- Be a Responsible Payer. ...
- Limit your Loan and Credit Card Applications. ...
- Lower your Credit Utilisation Rate. ...
- Raise Dispute for Inaccuracies in your Credit Report. ...
- Do not Close Old Accounts.
Highlights: While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.
Why did my FICO score go down when nothing changed? ›
Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed. However, if you are certain it is for no reason, check to be sure there is not a mistake in your credit reports or that you're not a victim of identity theft.
Is it true or false that the only way to improve your credit score is to pay off your entire balance every month? ›
Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.
What's the difference between credit score and FICO Score? ›
A credit score is a three-digit number that measures your financial health and how well you manage credit and debt. FICO scores are a specific type of score that lenders can use when making borrowing decisions. The FICO credit scoring system is the most widely used credit score.
How do I know if my FICO score is accurate? ›
The accuracy of your score will depend on factors such as which FICO Score model is being used; the credit bureau your report is pulled from; and whether your credit reports have up-to-date information. Errors on your credit report could also affect the accuracy of your FICO score.
When did 900 credit score go away? ›
At first, the VantageScore used a very different scoring range, 501–900, but in 2013 it changed its range to be the same as FICO: 300–850. Both use similar scoring factors, although the VantageScore places more weighting emphasis on the length of an individual's credit history.
Is 650 a good credit score? ›
As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score. The "good" credit range starts at 690.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2023, the average FICO® Score☉ in the U.S. reached 715.
How rare is 825 credit score? ›
Membership in the 800+ credit score club is quite exclusive, with fewer than 1 in 6 people boasting a score that high, according to WalletHub data.
How rare is an 800 credit score? ›
According to a report by FICO, only 23% of the scorable population has a credit score of 800 or above.
What is the average credit score in America? ›
The average FICO credit score in the US is 717, according to the latest FICO data. The average VantageScore is 701 as of January 2024. Credit scores, which are like a grade for your borrowing history, fall in the range of 300 to 850. The higher your score, the better.
Why did my credit score go down when I pay everything on time? ›
It might reduce the types, or 'mix,' of credit you have
But now you have one less account, and if all your remaining open accounts are credit cards, that hurts your credit mix. You may see a score dip — even though you did exactly what you agreed to do by paying off the loan.
Why does paying off a loan hurt credit? ›
However, when you pay off an installment loan, your credit report shows the account as closed, which could cause your credit score to drop. When calculating your credit score, FICO weighs open accounts more heavily than closed accounts.
Why is my credit score low if I pay all my bills on time? ›
A short credit history gives less to base a judgment on about how you manage your credit, and can cause your credit score to be lower. A combination of these and other issues can add up to high credit risk and poor credit scores even when all of your payments have been on time.
Does zero balance hurt credit score? ›
If you have a zero balance because you simply never use it, your credit card may stop sending updates to the credit bureaus, and that inactive credit card could potentially lower your credit score over time.
What brings credit score down the most? ›
5 Things That May Hurt Your Credit Scores
- Making a late payment.
- Having a high debt to credit utilization ratio.
- Applying for a lot of credit at once.
- Closing a credit card account.
- Stopping your credit-related activities for an extended period.
Bottom line. If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt.
The main reason why credit scores can vary is because they use different scoring models. A FICO® Score is calculated using a different formula than a VantageScore. And while most credit scores use a scale of 300 to 850, that isn't always the case.
What things lower FICO scores? ›
11 Actions That Can Lower Your Credit Score
- Making Late Payments. ...
- Using Too Much Credit. ...
- Applying for Too Many Credit Accounts. ...
- Closing Credit Accounts. ...
- Having Your Credit Limit Lowered. ...
- Defaulting on a Loan. ...
- Cosigning on a Loan That Becomes Delinquent. ...
- Accounts in Collections.
If you plan on applying for credit, make sure to check your FICO Score since there's a good chance lenders will use it to determine your creditworthiness. FICO Scores are used in over 90% of U.S. lending decisions.
What is the new FICO scoring system? ›
The FICO Score 10 Suite is the newest FICO credit scoring model, consisting of two scores: FICO 10 and FICO 10T. The FICO 10T credit score includes trended data, which looks at individual consumers' payment and debt history for the previous 24-plus months to help calculate their credit scores.
Has the credit scoring system changed? ›
While these new credit scoring models share some similarities, they also differ in some important ways. Most notably, VantageScore 4.0 will only require one month of credit history to generate a credit score. FICO 10T, on the other hand, will still require at least six months of credit history.
What is going on with credit scores? ›
FICO said the one-point drop in credit scores in late 2023 was driven by an increase in Americans missing payments and also by rising debt levels. The last time credit scores fell was between April and October 2013, when the average FICO score dropped by two points, to 690.
How is the new credit score calculated? ›
This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). Your FICO Scores consider both positive and negative information in your credit report.
