The Credit Score Formula Is Changing — Here’s What That Means For You

Photographed by Rachel Cabitt.

Yesterday, FICO announced that it’s changing up how it scores credit by introducing two new formulas, FICO Score 10 and 10 T. This is big news for all of us who are trying to take control of our finances this year. So how will it impact you personally? Read on for what you need to know.

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What is a FICO score?

FICO is a data analytics company that creates the most widely-used credit scoring system in the U.S. — approximately 90% of American lenders use scores provided by FICO.

Your FICO score is calculated and weighted in the following way:

35% comes from your payment history. That’s how often you make on-time payments. Late payments can stay on your record for up to seven years.

30% comes from credit utilization. This isn’t how much credit you’re using in a dollar amount, it’s a ratio that calculates how much you’re using of the total credit available to you.

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15% comes from the age of credit history. Note that this isn’t your age, but how long your credit accounts have been open.

10% comes from your credit mix, or what types of credit you have. Do you have only bank credit cards, or retail credit cards too? Do you have auto loans or mortgages? It’s better if you can show you have more than one type of credit that you’ve been paying on time.

10% comes from whether you have new credit. Have you been opening up a bunch of new credit accounts recently? That makes you look riskier, according to FICO.

The last time the FICO formula was updated was in 2014, with the introduction of FICO 9. With FICO 10 and 10 T, your score calculation is looking at even more factors.

How is the FICO scoring system changing?

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According to Yahoo! Money, one of the biggest updates specific to FICO Score 10 T is that it will take into account not just your credit balance right this moment, as previous FICO versions did, but your balance over the past 24 months. That means if your balance has been consistently growing over the past 2 years, your score will go down. On the other hand, if your balance skyrockets one month because you took a big birthday vacation, FICO 10 T will care less about it.

The changes broadly reflect trends in how people are racking up debt. For example, if you’re one of the many who’ve consolidated their debt into a personal loan in recent years, the new system will look at that disapprovingly — especially if you’ve seen taken on new debt since consolidating.

Overall, experts believe the change will create greater credit score disparities. If lenders choose to adopt 10 T, for example, people who are on track to improving their credit by making steady payments and decreasing their balance will likely see their score improve. People who are accruing more debt, even if it’s not a huge increase every month, will see their score fall.

Many people will see a shift of under 20 points up or down, which isn't huge. But still, when you’re struggling to get your score into the next range, even a change of 20 points can have a big impact.

When are these new changes coming?

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Thankfully, the changes won’t take effect immediately. FICO 10 and 10 T will roll out this summer, giving you some precious time to figure out how you’ll be hit by the new model and what your plan should be.

Even when the new FICO system is released, though, not all lenders will adopt it. Forbes reports that Equifax will start using FICO 10 right away, but as of now FICO 8 still remains the the model most commonly used by lenders. And other lenders may not even use FICO, but alternative scoring systems like VantageScore.

Still, these changes are something to keep in mind as you plan your finances this year and keep monitoring your credit score.

How to find your new FICO credit score

You can check if you’re eligible for a free FICO credit score check with your bank, credit card issuer or credit union. CreditKarma has a list of several that offer a free service, and Discover allows you to check your FICO score even if you’re not a card holder.

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