Before we get into the meat of this post, let’s first share some good news: The average FICO credit score for American consumers is 703.
That’s right, 703. We talked about it in a recent post, but it’s worth rehashing here. A credit score of 703 is considered “good,” and that’s good news for the average consumer, as it will likely mean they’ll be easily approved for loans and low interest rates compared to if their credit score fell in a lesser category. Like we said, that’s the good news.
Now, onto some of the bad news: The FICO score formula is changing, and it could cause a fluctuation in the neighborhood of 20 or so points in your credit score. In this post, we’ll take a closer look at what that big FICO score change is and how it could impact you.
The Biggest Change
First, let’s get into why FICO, or the Fair Isaac Corp., is making this change. Basically, it’s believed to be a direct reaction to the average consumer score currently sitting at a record-high 703. So in other words, too many people have too good of scores right now and there needs to be more of a direct distinction between those who have good credit and those who do not. On this note, the new FICO scoring model is going to calculate consumer account balances over a past period of up to 24 months. The biggest factor in this scoring model change is a consumer’s revolving debt, or debt that carries over month-to-month (i.e., credit card debt). If you pay off your credit card balance monthly, you won’t be impacted by this change. However, if you carry debt over month to month and have (or have had) a high credit utilization ratio, then you could see your credit score fall a bit.
As a reminder, a credit utilization ratio is essentially how much credit card debt you have compared to your total limit. Generally, you want this ratio to be at or under 30 percent for the best possible credit score. (For example, if you have credit card with a limit of $10,000, you’ll want the balance at or below $3,000 for the best possible score.) Under the new scoring model, even if your utilization ratio is under 30 percent now, if it wasn’t under 30 percent at any time over the past 24 months, you could take a credit score hit from it.
It’s estimated that about 110 million consumers will see some sort of change as the scoring model goes into effect. And though the majority of consumers will see a dip in their score, FICO estimates that about 40 million consumers can expect to see a credit score increase. While this scoring change may seem unfair, FICO says it will be able to help lenders and creditors better assess consumers who present a higher risk.
How to Beat the Scoring Model Change
So how do you beat the FICO scoring model change? For starters, if your credit utilization ratio is above 30 percent, make sure you get it down to at or below 30 percent. From there, make sure that you keep it at or below the 30 percent mark. Remember, this new scoring change is allowed to judge you up to 2 years in the past, so the longer you can go without going above the 30 percent credit utilization rate, the better off your credit score will be.
Of course, there are various other tried and true strategies you can implement to give your credit score a boost too. Here’s a look at some of them:
- Pay your bills on time: The greater the time between your last missed or late payment on any account, the higher your score will be.
- Credit mix: If you can wisely establish a healthy mix of different types of credit (i.e., revolving debt and types of installment debt), your score will benefit from it. Obviously, you should never apply for credit if you cannot afford to or if you don’t need to.
- Check your report: About one out of every four Americans has some sort of error on their credit report. Getting into the habit of regularly checking it can help you dispute issues faster.