You want to keep your credit score as high as possible so you can take out loans and credit cards with low interest rates.
Is paying on time good enough to achieve that goal? It may not be anymore, as the Fair Isaac Corporation recently announced its updated FICO Score 10 Suite credit rating system.
What is FICO 10?
According to the company’s press release, the FICO 10 Suite helps lenders make better lending decisions. By using trended data from credit bureaus, lenders can more precisely predict if you will be a trustworthy borrower. FICO 10 is set to launch this summer.
What is trended data? Information that gives lenders a clearer insight into your last 24 months of credit history.
Creditors and lenders want to ensure borrowers can pay their loans back. In doing so, they can prevent costly defaults. With FICO 10, defaults can supposedly be reduced by as much as 17 percent for mortgage loans, 10 percent for new cards, and nine percent for auto loans.
While the use of trended data can help lenders reduce their risk, what does this mean for you, the consumer? In a nutshell, it means that your credit score could either increase or decrease, even if you don’t change your credit habits much.
How FICO 10 Can Affect Your Credit Score
Millions of consumers are expected to be affected by FICO 10. If your credit behavior involves paying off debt quickly or keeping low balances, you could see your score increase.
Late or missed payments, meanwhile, will likely result in a credit score drop, as will carrying running credit balances each month. Also, if you take out personal loans to pay off those balances and incur even more debt, FICO 10 could penalize you with a score decrease.
Your credit utilization ratio will become more critical than ever. It’s the amount of credit you’re using compared to your overall limit. As a general rule, you want to keep your ratio under 30 percent.
Tips for Keeping Your Credit Score High After FICO 10
It’s no secret that late or missed payments can lower your credit score, so do your best to always pay on time. As mentioned, your credit utilization ratio is vital. Keep it under 30 percent by paying as much of your monthly balances as possible.
If you’re in the market for a car loan, mortgage, credit card, or personal loan, remember that FICO 10 won’t roll out to lenders until this summer. This gives you some time to adjust your credit behavior, so you won’t be penalized once the new system launches.
Check Your Score With Your Free Credit Report
The best way to stay informed of any changes in your credit score is to get your free annual report. It will let you know where you stand as a borrower and tell you which companies or government agencies have been looking at your credit.
By seeing your credit score and account history, you can look for any errors that could lower your score. You can also see if you’ve been a victim of identity theft should any unknown accounts appear.
At the very least, you should check your score once a year. Since you get one annual credit report free, there’s no excuse not to take advantage of this opportunity that can protect your financial future.