Deciphering the Implications of FICO's Updated Credit Scoring System

The introduction of the FICO 10 model has created a significant shift in credit scoring, with around 80 million consumers projected to experience changes of 20 points or more in their credit scores. This primarily affects individuals who occasionally lag in their payments, as they are prone to experiencing a decline rather than an improvement in their scores. So, what's truth and what's hearsay about this novel scoring system? Here's a comprehensive breakdown to keep you in the know.

Exploring the Dichotomy of FICO 10 and FICO 10T

This new era marks the first instance in FICO's history where two distinct versions of the general FICO score are available: FICO 10 and FICO 10T. The FICO 10T score has garnered significant attention, as it assesses up to 30 months of prior credit information to forecast consumer habits. To conceptualize, FICO 10 is a snapshot of your credit past, while FICO 10T resembles a condensed film. Furthermore, this updated system will leverage unique reason codes divergent from FICO 10, which necessitates additional time and resources to implement. Therefore, for the interim, your lender, such as CrossCountry Mortgage, may opt for the FICO 10 model.

Why FICO 10T Holds Relevance?

The rationale behind FICO 10T's necessity lies in the changing lens of lenders as they scrutinize potential borrowers. Citing NerdWallet, the seemingly inevitable conclusion of the economic expansion that permitted laxer lending standards is on the horizon. Moreover, lenders' insights into consumers' handling of the 2007 economic downturn have faded. Despite the average US credit score in January 2020 reaching a record high of 703, some financial pundits caution this as indicative of credit score inflation. As negative imprints from the recession disappear from consumer credit reports, scores are ascending, along with debt levels. Americans' debt continues to mount, even with broad improvements in credit scores. Individuals with credit card debt generally owe at least as much now as they did in the past decade.

The Value of Trending Data

Those who have encountered abrupt fluctuations in household income understand the frustration of a credit score that inadequately reflects their financial circumstances. David Shellenberger, FICO's VP of Product Manufacturing, contends that FICO 10T offers a "more comprehensive perspective" on an individual's finances. According to a 2019 JPMorgan Chase analysis, the typical family encountered significant income fluctuations, experiencing either surges or dips exceeding 25% of their median income, for five months each year from 2013 to 2018. This occurred despite real wage growth and low unemployment during the same period. As the American workforce navigates economic shifts, promotions, and job losses, FICO 10T will more effectively gauge these fluctuations. FICO 10 scores won't be accessible by Experian, Equifax, or TransUnion before summer 2020. Moreover, it will be longer before lenders adopt this revised system. Particularly for large lenders, full implementation might take another year. (Non-mortgage lending decisions typically utilize FICO 8, while mortgages predominantly employ FICO 2, 4, or 5.)

How Will FICO 10T Impact You?

For a considerable number of Americans, only a slight shift in their credit score is anticipated. Nonetheless, a predicted 40 million people could see their scores drop by 20 points or more. Here are a few circumstances where your score might decline:

1. If you have acquired a personal loan to consolidate credit card bills but your balances have surged again
2. If you've sought additional credit after securing a loan to settle credit card bills
3. If you've maintained a high balance (or escalating balance) on your credit cards that you struggle to offset

However, it's not all dire news. Certain consumers could witness their score climb by 20 points. This is particularly likely if you've been penalized for periodic high balances. For instance, if your annual summer vacation in July typically results in temporary high balances, FICO 10T can identify this pattern and adjust your score accordingly. Concerned about a less-than-ideal credit score impacting your home buying prospects? We can assist. Get in touch with a CrossCountry Mortgage Advisor today for more information!