Striving for a Perfect Credit Score: How New FICO Updates Will Impact Your Goal

Our FICO score can have a huge impact on our life. It is compiled using data from the major credit reporting companies — scores range from 300 to 850, with those of 700 or above considered ‘good’ — and is used by financial institutions such as banks to determine our credit risk, thereby affecting our ability to access credit and certain goods and services.

Recent changes to the FICO scoring system will therefore impact hundreds of millions of Americans. Below, we explain how FICO’s updated scoring model could impact your quest for the perfect credit score.

In January, after US household debt surpassed the heights seen before the 2008 financial crisis, FICO announced that its scoring model will now factor consumers’ debt levels into calculations of their credit scores.

It’s estimated that approximately 190 million Americans will be affected by the new FICO 10 model, with roughly 110 million consumers seeing changes of 20 points or less to their credit scores and 80 million experiencing a shift of over 20 points, with scores going both up and down.

An expected consequence is a widening of the gap between people deemed good credit risks and those who are considered bad, as relatively high credit scores improve and sub-600 scores endure the biggest drops.

So to what extent is FICO’s new model a divergence from the consumer-friendly policies previously employed by itself and rival credit scoring companies?

How FICO 10 Differs From Previous Models

In 2017, to the benefit of many consumers, the major credit reporting companies chose to exclude certain negative information from their reports.

A big factor in determining someone’s FICO score is their payment history (i.e. how they pay their bills), meaning information regarding indiscretions like missed payments, tax liens and collections resulting from loan defaults has traditionally played a significant role in determining an individual’s creditworthiness.

But 2017’s adjustment saw civil judgment and tax lien data, alongside information on millions of collection accounts, removed from credit reports, resulting in improvements for millions of consumers.

However, many now face a reverse in fortunes as FICO’s updated model factors in data regarding their personal debt.

What a Drop in FICO Score Means for Consumers

Unfortunately, the scores most likely to decline are those of around 580 and below, meaning these changes stand to deepen inequities within the existing credit system.

Marisabel Torres, of the Center for Responsible Lending, points out that people with lower incomes already have less access to personal loans on good terms, leaving them vulnerable to predatory lenders charging exorbitant interest rates. Talking to NPR, she explained that many predatory financial products are aimed at “lower-income neighborhoods, targeting communities of color especially who tend to have more limited options for financing and for credit."

Use of predatory lenders often traps consumers in self-perpetuating cycles of bad debt, and reducing the FICO scores of people already considered bad credit risks will force even more of them to resort to using insidious financial products.

Further potential consequences of a low FICO score include:

Refusal of Loan and Credit Applications

Creditors are often unwilling to lend to individuals with low credit scores, regardless of other mitigating factors.

Difficulty Establishing Utilities Contracts

Utility companies review credit scores during the application process, often requiring people to pay a security deposit in order to commence service if they’re perceived to have a poor credit history.

Refusal of Cell Phone Contracts

Credit checks are also part of the sign-up process for most cell phone companies. People with low credit scores are normally required to purchase prepaid phones or month-to-month contracts, both of which tend to be more expensive. Alternatively, they are faced with higher payments and/or larger upfront costs.

Difficulty Buying a Car

Obtaining a car loan is much harder if you have bad credit. Even if someone with a low credit score is accepted for a loan, it will come at the cost of increased interest rates and subsequently higher monthly repayments.

Denial of Employment

Many jobs in the finance industry and upper management will turn away applicants due to negative items on their credit report.

Increased Insurance Premiums

Though it is one of many rateable factors, insurance companies will use an individual’s credit score to help determine their premiums. People with worse credit will generally be charged higher rates.

Difficulty Starting a Business

The types of bank loans often needed to fund startups are less accessible for individuals with a bad credit history. Loans will likely be refused if the person applying for them has a low credit score, even if they have a sound business plan.

How to Strive for a Perfect Credit Score

Given the limitations that accompany having a low FICO score, it’s important to keep yours as high as possible. Even if you can’t achieve a perfect credit score, a sensible credit strategy encompassing these simple pieces of advice will increase your creditworthiness over time:

Monitor Your Credit Report

The three major credit reporting companies — Experian, Equifax and TransUnion — provide the data that FICO and its competitors use to calculate your credit score. You’re legally entitled to a free report from each of them once a year. By requesting them at four-month intervals, you can periodically check the accuracy of your reports.

Pay Your Bills Promptly

Roughly 35% of your FICO score is determined by your payment history, so paying bills on time is crucial. Even if you’re unable to settle the full balance, paying the minimum amount will prevent incriminatory late payments.

Limit Your Credit Usage

Your credit utilization (the percentage of your available credit that you actually use) also impacts your credit score.

Be Prudent With Credit Applications

New credit accounts lower your average account age, which in turn has a negative impact on your FICO score. If possible, avoid regularly seeking new lines of credit.

If you’re striving for a perfect credit score, you’ve already completed the first step. Knowing what it is and how it’s calculated, and understanding how the new FICO updates work, will enable you to act accordingly and improve your score. Good habits are key. By adopting the right ones and incorporating them into your everyday life, your credit score will steadily increase by itself.