Become Debt-Free

How to maximize your credit score under the new FICO model


Last week, the Fair Isaac Corp. announced a new credit scoring model rolling out this summer that could change over 110 million consumers' credit scores. But the changes to FICO's model won't alter your score significantly if your credit habits already score well with the company.

FICO is a popular credit scoring model used by companies to assess a consumer's credit worthiness. A score, valued from 300 to 850 in the FICO model, helps determine what interest rates, car and home loans, credit cards and other financial products and services a consumer is offered.

The newest version, FICO 10, will weigh each consumer's total debt load and payment habits more heavily when calculating their credit score. FICO is primarily interested in monitoring your credit card balances — not necessarily your mortgage or student loan debt — to see if they are consistently increasing or you are routinely seeking new credit.

Higher levels of debt and missed payments will lower your score. Those in good financial shape already don't have much to worry about. But anyone who's been accruing more and more credit card debt will likely see their score take a hit. Around 110 million people will see a change in their score, per FICO, but it isn't likely to be dramatic: Consumers can expect a change of around 20 points up or down, though of course it will depend on each individual's financial situation.

"The concern is that they want to be more realistic about borrowers' ability to pay back a loan," Oleg Yavorovskiy, founder and CEO of Guardian Debt Relief, tells CNBC Make It. "While FICO and others once used a more flattering credit model, the purpose of a credit score is to access true creditworthiness."

Still, if you're worried about how the new model will increase or decrease your score, here's what you need to know:

It won't change your score right away

FICO routinely updates its scoring model, but lenders don't typically start adopting it right away. Consumers can expect many lenders to start using it next year, Dave Shellenberger, FICO vice president of product management, told CNBC Make It. Many lenders, in fact, still use FICO 8, which debuted in 2009.

That means you still have some time to implement better credit habits before your score decreases under the new model.

Your debt will be more highly scrutinized

The big change with FICO 10 is how the company evaluates your debt load. It will now factor your credit behaviors from the past two years into your score, rather than just the past month, says Yavorovskiy. If you've been practicing sound credit habits for a while, then that's no problem. But if you made a few late payments a year ago, it could hurt your score. Recent missed payments, too, will be weighed more heavily.

It will also treat different types of debt differently. John Ulzheimer, a credit score expert, told CNBC Make It that revolving credit, including credit card debt and lines of credit, is a bigger factor in determining your score than so-called installment credit, which includes mortgages and student loan debt.

What happens when you don't pay off your debt?
What happens when you don't pay off your debt?

"You can have hundreds of thousands of dollars of installment debt and still have elite credit scores," Ulzheimer said. "It's the revolving debt that's problematic."

People who rely on credit cards during times of financial instability are likely to see their scores decrease. For example, say you have credit card debt, you decide to consolidate it in a personal loan and then continue to take on more credit card debt, your score will probably dip under the new model.

Finally, your overall debt load will be weighed differently under the new model. Before, consumers might have paid off a bunch of debt shortly before applying for a new financial product and seen a bump in their score. Now, FICO wants to see your debt levels continuously trending down over many months.

Credit basics are still important

The factors that FICO looks at to calculate your score overall aren't changing with the new model. Payment history will still make up about 35% of FICO scores, the most of any one factor, so paying your bills on time (and in full) remains crucial to getting a good score. While installment debt like student loan debt in and of itself won't hurt your score, you have to make your payments every month. If you can't afford to pay off your entire balance in one month, then it's better to make the minimum payment than nothing at all, says Yavorovskiy.

Source: myFICO

Around 30% of your FICO credit score is based on the total amount you currently owe, and that's still true under FICO 10. You want to keep your balances as low as possible, definitely using no more than 30% of your available limit with products like credit cards. If your credit card has a $10,000 limit, then you never want want to owe more than $3,000 at any one time.

After those two factors, the length of your credit history, your mix of loans and the new accounts you've applied for recently remain important to calculating your score. You can read more about those here.

Consumer debt levels keep increasing

FICO 10 underscores that consumers are accruing more and more credit card debt, making them more of a credit risk. But paying down high-interest credit card debt should be a top priority for anyone who carries a balance, regardless of whether they want to see a boost in their credit scores.

Instead of worrying about a slight change in your credit score, focus on paying your bills on time and keeping your balances low. Not only will those practices increase your credit score, but they'll put you in control of your finances overall, and leave you less likely to fall into debt.

Don't miss: 110 million consumers could see their credit scores change under new FICO scoring

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Here’s how to achieve the perfect credit score
Here’s how to achieve the perfect credit score