FICO has announced a new suite of credit scoring models, Fico Score 10 and 10 T, that could result in credit score drops, especially for consumers whose credit scores are already low. Should you be worried?
The short answer is “not yet.” But it is a reminder to monitor your credit scores and look for opportunities to build stronger credit. Doing so will position both consumers and small business owners for opportunities to borrow on better terms. (There are over 138 places to monitor your credit scores for free.)
FICO Score 10 T is a new scoring model that uses “trended credit bureau data,” which looks at how credit information has changed over the previous 24 months. Traditionally, credit scores have been based on a credit report that is a snapshot of credit information at a moment in time. This means the credit score doesn’t always take into account changes in balances, for example. With this new model, FICO will better be able to evaluate how the borrower’s balances and payment histories have changed over time.
The Wall Street Journal reports that FICO says the new model “will create a bigger gap between consumers deemed to be good and bad credit risks.” Reportedly consumers with higher credit scores (680 or above) may get higher credit scores as long as they continue to pay on time and manage debt well.
But consumers with lower credit scores (below 600) who continue to struggle with payments or debt may see their credit scores go down.
Reportedly, this model may also affect consumers who have refinanced high credit card balances with unsecured personal loans. Refinancing high balance credit card debt with personal loans has been one way that some consumers have tried to manage their debt, and this can often result in better credit scores. That’s because these loans (which are installment loans) do not impact their credit scores in the way that high credit card balances (revolving debt) in comparison to the limits have.
It’s important to understand that:
- There are over 40 FICO credit scoring models. Lenders have the choice of the model(s) they want to use, and may customize those models.
- Adoption of new models often takes time, and FICO 10 T will not be available through bureaus until the summer of 2020. Adoption may take significantly longer. (FICO says this model is easier to adopt, but traditionally lenders have been slow to change scoring models.)
What Business Owners Should Know
According to a 2019 Nav survey, nearly half (46%) of business owners surveyed use a combination of business and personal credit cards, 19% percent use only personal credit cards, 18% use only business credit cards, and 16% don’t use credit cards at all.
Business owners should keep in mind that some small business credit cards do not report to personal credit, which may help them effectively separate their business and personal credit and protect their personal credit from the impact of their business. (Here’s a list of which major small business credit cards impact personal credit.)
Entrepreneurs who use personal credit cards or business credit cards that report to personal credit will want to make sure they keep balances low and set up alerts and/or automatic payments to avoid making late payments.