FICO Is Changing the Way It Calculates Credit Scores. Here’s How You May Be Affected…

Your credit score is a three-digit number that can determine whether you can buy a house or a car, rent an apartment, secure a favorable insurance rate, or even get certain jobs. It’s a big deal in the financial universe, and it’s about to undergo a significant change, according to The Wall Street Journal.

The Fair Isaac Corporation (the company that created the three-digit FICO score) is updating the method it uses to calculate credit scores. FICO tweaks its formula every few years, and this time around the most noticeable change will be the way that FICO factors personal loans into its equation.

Personal loans are the fastest-growing type of consumer debt, and FICO will now be considering this type of loan as a separate category to determine whether borrowers have used them responsibly.

Many consumers use personal loans to pay off high-interest credit card debt by consolidating multiple payments into one single loan. Under the old system, doing this may have resulted in a higher credit score. Under the new formula, FICO will look back over the past two years to see whether the use of personal loans in this manner has resulted in new revolving balances or increased cyclical debt.

What do these changes mean for the average consumer? Those who already have a good credit score will likely see their score improve. Unfortunately, people who are already struggling financially may see their score decline. It’s estimated that about 40 million Americans could see their credit scores increase by 20 points or more, while an equal number may see their credit score drop by about the same amount.

Despite the changes to FICO’s formula, the main factors that determine credit scores haven’t changed, and common wisdom still applies. Make your payments on time, don’t apply for more credit than you need, and keep your outstanding card balances to a minimum.

If you’d like to keep closer tabs on your credit score as these changes take effect, you can check each of your credit reports once a year for free through the authorized website annualcreditreport.com.

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