The strength of a person’s credit score can be their ticket to securing a personal loan with a competitive interest rate. The way these scores are calculated is changing, however, as consumer behavior continues to be looked at through a broader lens. Specifically, FICO has updated its industry-leading FICO Score to better reflect these changes, providing lenders with the most comprehensive data available.
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Credit Score 101
A credit score is a measurement of a person’s creditworthiness based on their credit history. Most credit score models range from 300 to 850; where a consumer falls in the spectrum determines their eligibility for credit (whether it’s a loan or credit card) and the interest rates offered to them. Originally created by the Fair Isaac Corporation (FICO), credit scores are collected by credit bureaus, notably Equifax, Experian and TransUnion, and provided to lenders to assist in their decisioning on potential borrowers.
The traditional FICO credit score draws upon a number of variables. The main five are: a person’s credit payment history, the amount of debt they owe, the length of their credit history, the types of credit they have (credit mix) and their new credit. For some of these, lenders gain access to a snapshot of a person’s current status (e.g., their most recent credit card balance statement).
FICO Score 10
Under the new FICO credit score model, the FICO Score 10 Suite, most of the above variables remain the same. One main difference, pertaining to the new FICO Score 10T, is the broader timeframe the data is taken from and the different emphasis placed on each variable as a result. As opposed to FICO Score 10, the FICO Score 10T uses trended data. Rather than just a recent snapshot, lenders can view trends in a consumer’s credit behavior over a 24-month period.
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According to FICO, this change will allow lenders to make more precise decisions about a borrower’s eligibility. For consumers, the new FICO model’s effect is twofold. On one hand, it emphasizes a broader picture of credit behavior, meaning a lengthier stint of bad credit history could affect one’s ability to borrow. On the other hand, trended data can also better identify a consumer who has made efforts to improve their credit over 24 months, which can enhance their status as a creditworthy borrower.
While the FICO 10 Suite is due to roll out in Summer 2020, lenders have been historically slow in adopting new updates to the FICO system. Nevertheless, as the changes will affect how FICO scores are eventually calculated, they’re worth noting. By adapting to the changes in advance, consumers stand to benefit, which will assist lenders in providing attractive interest rates on personal loans.
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