The Fair Isaac Corporation created the “FICO Score” to determine people’s creditworthiness. This is a different type of credit score than the one provided by the three main credit bureaus (Equifax, Experian, and TransUnion).
The FICO Score factors in the details of your credit reports to determine your credit risk. It looks at specific factors of your credit history, such as its length, and your recent credit accounts, payment history, and credit types.
Based on this information, FICO Scores range between 300 and 850. The lower number is the worst, while the highest number is the best. If you want to increase your chances of getting approved for any type of loan, you need a high FICO Score.
The Fair Isaac Corporation recently announced two new versions of the FICO scoring model: FICO Score 10 T, and FICO Score 10. This isn’t necessarily bad news for people who want to obtain loans. It’s only bad news if you already have a low FICO Score.
The scoring formula of the new FICO Score 10 will factor in consumer debt levels. The decision to update the FICO scoring model accounts for the fact that over the past two years, total U.S. household debt has rapidly increased and now sits at $13.95 trillion. When you consider that the total national household debt was $12.68 trillion just before the Great Recession of 2008, it makes sense for credit companies to take precautions now.
Someone who now has a higher FICO Score will probably see a 20-point increase under the new FICO Score 10 version, while someone with a lower FICO Score will see about a 20-point decrease. The update may affect approximately 80 million people positively or negatively. Current personal loans, in particular, are a major factor that will influence FICO Score 10 rating.
FICO Score T considers the trending data of consumer credit behavior from the last two years. If the historical trajectory shows that consumers have paid their debts on time and have not incurred more debt, it could boost their FICO Score tremendously. On the other hand, if the trajectory shows the consumer amassed more debt or has been unable to make payments on their current debts, their FICO Score will decrease significantly.
It is not unusual for the Fair Isaac Corporation to update its FICO scoring policies. There is an update to these policies about every five years. The latest FICO scoring policy update pertains to the way personal loans influence the FICO Score.
Since personal loans seem to be the most popular type of loan right now, credit agencies need to be careful. Currently, over $300 billion is owing on these personal loans. As this number increases, the chance of another recession becomes much higher.