MyBankTracker recently reported on the latest FICO changes, which will incorporate your utility payments and rental history to determine your score. Today, I’m taking a more in-depth look at how the new model will make it easier for people to qualify for loans or lines of credit going forward.
Who stands to benefit the most
The Fair Isaac Corporation estimates that there are 53 million people in the U.S. who don’t have a FICO score and the most recent scoring model shift is expected to impact about 15 million of them right away. Specifically, this includes people who either haven’t established a credit score yet or who have a poor credit history because of a financial misstep in their past.
That being said, certain consumers may be able to get more mileage out of the changes than others. According to NextAdvisor.com Senior Editor Julie Myhre, someone who doesn’t have any credit at all is likely to see the biggest boost, rather than someone who already has a few black marks on their history.
“People who have bad credit still need to build it up,” says Myhre, “but if you have no credit at all, once you start making payments on time it’ll be easier to build a history that’s positive compared to people who are starting out in the negative.”
That doesn’t mean that the new scoring model won’t help you out if you’re trying to bounce back from a foreclosure or bankruptcy. While it can’t eliminate your bad credit history, having an alternative score can help to balance things out a little so lenders aren’t as reluctant to give you credit.
How the changes will impact credit card approvals
The new FICO score doesn’t replace any existing score you may have; instead, it works in conjunction with the old one and lenders will look at both when making approval decisions. If you had a zero FICO score before, you’re basically starting from scratch but that’s not necessarily a bad thing. In fact, it can work in your favor if you’re trying to open up a credit card account.
There are certain cards, for instance, that specifically target consumers who tend to have lower scores. At a minimum, you usually need at least a 620 to qualify but according to Myhre, someone who only has a score under the new model should see fewer obstacles to getting approved.
There’s a trade-off, however, since they may get hit with a higher interest rate or have a lower line of credit compared to someone who’s got a higher score. If you plan on paying the balance in full each month, that shouldn’t be an issue. As you use the card and pay it off, you’ll continue improving your score which should make it easier to qualify for better rates down the line.
Tip: A secured credit card is worth considering if you’re still having trouble getting approved for a traditional card. These cards typically carry higher fees and interest rates but they can be a bridge for building your credit history.
What about qualifying for a mortgage?
For now, the new FICO scores are only being used to make approval decisions for things like credit cards and personal loans. The goal, says Myhre, is to help people build their credit through other avenues first so that eventually they can work towards getting something bigger like a home loan. Creating a dynamic credit history can improve the odds of being able to get a mortgage.
It’s expected that once the new model is available to mortgage lenders it’ll create a level playing field for consumers who are looking to buy a home. That’s a plus for millennials who are steering clear of credit cards because of fears about ending up in debt or only have student loans showing up on their credit reports. Myhre hopes that 20-somethings will take the time to understand how the new scores work so they’re better able to use them to their advantage.
“Millennials are terrified of debt but they often don’t understand how much their credit impacts them, “she said. “Hopefully, this new score will show them that credit cards aren’t all bad and that there are benefits to using them responsibly.”
Paying bills on time is key
While the new model looks at things like your cell phone and utility bills rather than just your debts, that doesn’t mean that making on-time payments is any less important. Your payment history accounts for 35 percent of your FICO score so even one slip-up could be extremely damaging to your credit.
Because the new model looks at bill payments that weren’t previously included in FICO score calculations, they have the potential to do as much harm as they do good. That, says Myhre, is something consumers who stand to be affected by the changes need to be aware of.
“These scores they have the ability to help millions of people but they could also easily hurt themselves if they don’t stay on top of the bills that are counting towards these scores. By paying on time you’re showing the lender that you’re worthy of taking a risk on.”