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  • Bob Brooks

FICO Changes Could Lower Your Credit Score

Changes in how the most widely used credit score in the U.S. is tallied will likely make it harder for many Americans to get loans.

Read in The Wall Street Journal:

Your Credit Score Could Be Going Down

The FICO credit score is the gold standard for credit scoring. FICO adjusts/modifies their scoring system every few years to help determine the true risk level of borrowers. Remember lenders rely heavily on this data as they continue to loan money. The reality of the situation is that consumers often look better on their credit scores/reports than they are. A person with a lot of debt could look like on paper a good credit risk. Yet, in reality, a bank would be crazy to lend money to them. So best I can tell, here are the major impacts:

  • Personal loans will be a have a greater negative drag on your credit score

Currently, since personal loans are considered installment loans and not revolving credit card debt, their impact on credit scoring is not as negative. Yet they are still a debt obligation. The personal loan industry has exploded because of this unrealistic reporting. Let's face it, debt is debt whether it is an installment agreement or a revolving charge card.

  • If balances start rising quickly and or missed payments occur, credit scores will be negatively affected sooner rather than later

Recent missed payments or dramatically increasing debt balances will be a much more negative drag on credit scores. This is to help lenders see that a consumer might be getting into trouble. In contrast, if a borrower who missed payments years ago might see their credit scores go up. It is almost like the old system kept penalizing you for your past where this new system rewards you for the improvement of your habits in the present.

  • Higher credit utilization rates will have a larger negative effect on scores

Today you could have a lot of debt and at the same time make all of your payments on time and have good credit habits. Your credit utilization score or the amount of credit you are borrowing from credit limits will not have as much of a negative impact. With this new scoring system, the higher credit utilization will have a negative impact than the current scoring model.

To make matters worse, credit card and personal loan companies are already charging extremely high-interest rates on debt as it is. Credit companies are handing out high-interest credit like candy. They are feeding the need for money. This greed is going to catch up with the credit industry as the next downturn heads our way. With possible declining credit scores, high-interest rates, and over 1 trillion dollars in credit card debt, what could go wrong?

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