FICO’s new credit scoring algorithm will consider your credit habits over a 24-month period instead of just looking at a snapshot in time. It’s a significant change, but the fundamentals of good credit stay the same.
This is big news because your credit score is one of the most important numbers in your financial life. It goes a long way toward determining whether or not you’re approved for loans and lines of credit, and if so, it helps set the interest rates you’ll be charged.
FICO is the market leader: 90% of top lenders use FICO scores when making lending decisions. The new release, the FICO Score 10 Suite, builds upon the last major update (FICO 9, which came out in 2014). This is the first time FICO unveiled two new versions at the same time.
FICO 10 and FICO 10T both improve upon FICO 9 and other previous iterations. The company pledges the FICO 10 suite will lower default rates as much as 17% for newly originated mortgage loans, 10% for newly issued bank cards and 9% for newly originated auto loans.
See related: 10 tips to improve your credit score in 2020
How trended data works
FICO 10T is the best version because it incorporates trended data. Let’s say a consumer has a big one-month spending spike (a vacation, holiday shopping, back-to-school shopping, etc.). If FICO knows from 24 months of trended data that this individual usually keeps his or her credit utilization low, they’re not going to count that one big spending month against them as much.
It’s all about smoothing out the peaks and valleys and relying less on one specific moment in time. I think this makes a lot of sense.
FICO’s main competitor, VantageScore, has used trended data for years. My colleague Brady Porche interviewed FICO Vice President of Scores Sally Taylor-Shoff in 2017, and at the time, she had this to say about trended data: “We’ve studied trended data, and we haven’t found that the return on investment is there. There’s a lot of talk about being able to find some significant lift in small pockets. But for issuers and lenders, they need to see ROI across the board. They have to pay a premium for trended data.”
FICO has evolved on this. Its hesitation seemed to be that lenders can be very traditional, and they typically want to keep credit scoring as apples-to-apples as possible. Introducing trended data brings a whole new set of reason codes (standard explanations for why a consumer was denied credit or why his or her credit score is not higher).
While building the FICO 10 suite, the company discovered many of its customers would be willing to sign up for trended data and would accept more complexity as long as the outputs prove superior, FICO Vice President of Product Management Dave Shellenberger recently told me.
See related: The definitive guide to debunking credit score myths
Change takes time
This hits on another key point: Progress can come slowly in the credit scoring space. The most-used credit scoring formula is still FICO 8 (which came out in 2009). The biggest changes from FICO 8 to FICO 9 were removing paid collections, deprioritizing medical collections and better measuring those with limited credit histories. Trended data is the big addition with FICO 10T, and the entire FICO 10 suite includes other tweaks such as more granular treatment of personal loans.
My main point here is that we all have several different credit scores, and we shouldn’t assume our particular lenders are using the latest and greatest editions.
My mortgage lender, Mr. Cooper, is still using FICO 4 (which came out in 2004). American Express uses FICO 8. And Wells Fargo shows me a FICO 9 score. My scores range from 796 (FICO 4) to 818 (FICO 8) to 833 (FICO 9). All use the same 850-point scale, yet my scores vary 37 points.
Fortunately, my scores are all very good, and once you hit 740, there aren’t tangible benefits to going higher (just bragging rights). But a 37-point gap would be very meaningful if I were straddling the lines between fair and good credit, or between good and excellent.
The myFICO.com Loan Savings Calculator estimates that someone with a 640-659 credit score would qualify for a 30-year fixed-rate $200,000 mortgage at 4.388%, whereas someone with a 680-699 would get 3.744%. Over 30 years, the higher credit score would save $26,840 in interest!
See related: Credit cards that offer free credit scores
Ultimately, my best advice for consumers is to practice strong fundamentals. Pay your bills on time, keep your debts low and monitor your credit reports for errors. There are a lot of nuances in credit scoring, but the basics are constant, and they will pay off over time.
The FICO Score 10 Suite will launch this summer (first with Equifax, then with Experian and TransUnion by year-end). I’m also keeping an eye on UltraFICO, FICO’s deepest foray into alternative credit scoring, which is in the pilot stages and will hopefully become more broadly available soon.