In 1989, the Fair, Isaac, and Company (FICO) established FICO scores. It provided an industry standard for scoring creditworthiness. It was fair for both consumers and lenders. Before FICO, there were many different scores with various calculating methods, sometimes including gender or political affiliation.
FICO Most Commonly Used Score
Using the FICO three-digit number, lenders determine how likely you are to repay a loan. A high FICO score affects how much money you can borrow for that house. It also influences the repayment terms and interest rate.The FICO is the most used credit scoring system. Indeed, 90 percent of mortgage applications incorporate FICO into the decision-making process.
Scores range from 300 to 850. “Good” credit scores are between 670 and 739. These scores go up to “very good,” 740 to 799, and “exceptional” at 800-plus.
Why Change the FICO Score?
Periodically, credit rating agencies update their scoring methodologies. This is to reflect improved analytics and the most recent data.The last upgrade was FICO 9, released in 2014. But most lenders are still using FICO 8, which was released in 2009. Most lenders are still using it because of the cost of upgrading.
Free Credit Reports Available
Before the pandemic and its economic shutdown, credit bureaus allowed one free credit report from each bureau per year. But in 2020, the bureaus offered free weekly credit reports.Medical Debt Removed
Medical debt was addressed. Starting in July 2023, bills turned over to collection agencies, but eventually paid, will no longer appear on a credit report.You may have noticed some medical debt disappearing from your report. That’s because starting in 2023, medical collection debt under $500 was removed from a credit report.
And, finally, in July, people will have 12 months to work out insurance or billing issues for unpaid medical bills. Six months is the current grace period.
‘Buy Now Pay Later’ Added
“Buy now, pay later” (BNPL) is a credit model that appears online. Amazon, Target, and Walmart all have BNPL available. PayPal also has a BNPL program. It allows the consumer to purchase and pay the balance off over a set amount of weeks. It’s a short-term loan with no interest.In the past, BNPL didn’t affect a consumer’s credit score. It wasn’t reported to the big three credit bureaus. But that will change. BNPL loans will now count toward your FICO.
Bureaus Allow Rent Reporting
Experian Boost will allow reporting of rent that is paid on time. Having this change creates more equitable lending practices by lenders. This positively affects first-time homebuyers. They can now establish more credit without using revolving credit and other borrowing.‘Trended Data’ Emphasis
Trended data is a longer-term view of credit. For example, in the past, FICO looked at a monthly snapshot of credit card usage. But FICO 10 evaluates credit card usage trends over 24 months.So, if you take a vacation and carry a high credit card balance for a couple of months after having a good time, you’re less likely to see a lower credit score if you pay it off in a timely manner. But someone who doesn’t pay off balances consistently is penalized.
FICO Looks at Credit Card Debt
Those consumers carrying credit card debt may see a drop in their FICO score this summer. Because the new credit scoring model will now look at 24 months, those carrying balances month to month will see a drop in their score.Jury Still Out on FICO Changes
There are pluses and minuses with the new changes coming this summer. Those with medical bills will find some relief for their credit scores. In addition, renters will be able to establish additional credit for purchasing a house.However, people who don’t pay off their revolving debt each month may find their FICO score slipping.
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