You will soon see a change in your credit scores. Expect these changes to go into effect summer 2020. For some, scores will take a dive, while others will rise. The new scoring model does not target people with existing mortgages or student loans. It instead targets your payment habits, with credit cards in particular. When the time comes you may see around 20 point change in either direction.
Who will see an increase?
Obviously, the short answer is, it depends. However, here is a great yardstick to get a better gauge. If you have student loans, mortgages, and auto loans with high balances but credit card balances fairly low, you may see an increase.
Why? The new model is geared to curb spending. It is an attempt to strong arm you into managing your revolving debt, and start targeting your loans. They want us to pay down our credit cards to an “appropriate level”.
As a general rule of thumb, people with excellent credit keep their balances on revolving accounts under 10% utilization. People with good credit keep their utilization under 29%.
How is my score calculated?
We do look at overall balances, but we look at it in the context of everything else that’s going on that account, and that includes what your credit card balances look like and how aggressively you’re seeking new credit.Dave Shellenberger, FICO vice president of product management, tells CNBC Make It.
Here’s a quick break down of where your older loans fit into this picture.
Mortgages, student loans, auto loans balances will typically be on your report the longest. So what the new model is concerned with in that regard is ontime payments, however small they may be.
On time payments is and probably always will be a heavier weight in the scoring model. this is literally how credibility(aka trust) is defined. Next, we have the amount overall amount owed at around 1/3 the weight of your score.
Length Of History
The magic number here is 7 years. Fico takes the average age of all your open accounts to calculate the length of credit history. That means, if your oldest accounts are well over 7 years, you might want to thinks twice before closing them.
Personal experience: I have an old fingerhut account I never use, I won’t close it until my average age of other accounts reaches 7 years. That way it won’t have a negative affect on my overall score.
Ok this will be the first thing that the new scoring model will curb. If you are carrying high balances on your revolving accounts, you will have a tougher time opening new credit cards.
FICO is encouraging repayment of revolving accounts. Allowing you to continue racking up debt is not the way to go. Credit in the U.S. has grown to an obnoxious $50 trillion, while actual cash in circulation is just $3 trillion. Yeah, that’s the current state of our economy.
The Bigger Picture
In an economic down turn, consumer spending has to be brought back under control. Credit, is a promise to pay the bank back at a later date. If we the consumer, keep making more promises by the millions, the economy will begin to tighten. We are already at that point. It happens in cycles. The new scoring model can be seen as FICO’s way of preventing or slowing an economic bubble thats ready to burst.
I found a great video that explains exactly where we are financially, and where we might be headed. I wish this was available back when I was in school..
Take a look, and take notes.