If you have a credit card, chances are you’ve seen your FICO score. This number is important because it is one factor that lenders look at when considering you for a loan. Your payment history, credit utilization, and length of credit history all play a role in calculating your FICO score.
FICO scores range from 300 to 850, with the median score being 723. A score of 720 or higher is considered “excellent” by most lenders. If your score falls below 680, you may have difficulty securing a loan or getting a lower interest rate. The good news is that there are steps you can take to improve your score.
The bad news is that there are also things beyond your control that can impact your score – like changes to the scoring model itself. Every few years, FICO updates its scoring model in an effort to reflect the current borrowing landscape and better predict consumer behavior.
For 2022, there are some significant changes coming to the FICO scoring model that could impact your ability to get a loan or qualify for the best interest rates. In this post, we will explore these changes and what you can do to prepare for them.
What is FICO?
FICO is a credit scoring system that is used by lenders to help determine whether or not a potential borrower is worth the risk of extending credit to. A high FICO score means that you have a good history of repaying your debts on time and are therefore considered to be a low-risk borrower. A low FICO score, on the other hand, indicates that you may be more likely to default on a loan, and as such, lenders will often charge higher interest rates to offset the additional risk.
FICO scores are based on a number of factors, including your payment history, credit utilization, length of credit history, and types of credit accounts. Payment history is the most important factor in determining your FICO score—in fact, it accounts for 35% of your score. This means that if you have a history of making late payments or missing payments altogether, your score will suffer as a result.
Credit utilization (30% of your FICO score) is another important factor in determining your score. This refers to the amount of debt you have relative to your credit limit. For example, if you have a credit card with a $5,000 limit and you currently owe $3,000 on that card, your credit utilization would be 60%. The lower your utilization rate, the better it is for your score.
Length of credit history (15% of your FICO score) is also taken into account when determining your score.
What are the changes to FICO in 2022?
In 2022, FICO will be making some changes to the way they calculate credit scores. This could potentially have a big impact on your credit score, so it’s important to be aware of the changes and how they might affect you.
One of the biggest changes is that FICO will no longer consider tax liens and civil judgments when calculating your score. This is good news for people who have paid off their debts but still have these items on their credit report.
Another change is that medical collections will no longer be treated as harshly as other types of collections. This is good news for people with medical debt, as it will no longer have such a negative impact on their score.
Lastly, FICO is changing the way it treats inquiries from potential lenders. Previously, multiple inquiries in a short period of time would ding your score, even if you only ended up taking out one loan. Now, FICO will only count inquiries from the last six months when calculating your score.
These are just a few of the changes being made to FICO in 2020. If you’re concerned about how these changes might affect your credit score, be sure to stay up-to-date on the latest information and talk to a financial advisor if needed.
How will the changes to FICO affect you?
The changes to FICO will affect your credit score in a number of ways. First, the new scoring system will place more emphasis on recent information, which means that if you have a history of late payments, those late payments will have a greater impact on your score than they would have under the old system.
Additionally, the new system will no longer factor in medical debt, which means that if you have medical debt, it will not impact your credit score. Finally, the new system will place more emphasis on lines of credit that are in good standing, which means that if you have a good history with credit cards, your score will be impacted positively.
What can you do to prepare for the changes to FICO?
1. Check your credit report regularly
The first step you should take is to check your credit report regularly. You can get a free copy of your credit report from each of the three major credit bureaus once per year at AnnualCreditReport.com. By law, the credit bureaus must provide you with a free copy of your report if you request it. Reviewing your report will help you catch errors and identify any negative information that could drag down your score.
2. Keep tabs on your credit utilization
One factor that makes up a significant portion of your FICO score is credit utilization, which measures how much of your available credit you’re using at any given time. The lower your utilization, the better for your score—so it’s important to keep tabs on this number and make sure it stays low. A good rule of thumb is to keep your utilization below 30%.
3. Make payments on time
Payment history is another important factor in determining your FICO score, so it’s crucial to make all of your payments on time, every time. Set up automatic payments if necessary to ensure that you never miss a due date. Even one late payment can damage your score, so it’s important to stay on top of things.
4. Keep old debt and new debt in mind
When evaluating your debt load, lenders will look at both the amount of debt you have and the type of debt you have.
The changes to FICO scores in 2022 are significant, and if you’re not prepared for them, you could end up paying more for credit. But don’t worry — with a little planning, you can make sure you’re on the right track. Start by checking your credit report and score so you know where you stand. Then, take steps to improve your credit, such as paying down debt and maintaining a good payment history. By taking these steps now, you can avoid paying more for credit later on.