Changes to FICO and what that means to you.

FICO affects almost everyone, whether you know it or not. If you have had any outstanding debt in the last few years, you have a FICO score, even if you don’t know it.

That score is used by lenders (credit card companies, apartment complexes, and even insurance companies) to determine how likely you are to repay the money you borrow.

If you score over a 750, you are considered a low risk, and therefore will receive better offers and lower interest rates. Below 550, well, you may not get the loan you want, or if you do, you’ll have to pay more in interest through a higher interest rate. Currently, the average score is a 709.

FICO announced this week that they are tweaking their scoring algorithm, and its estimated that 80 Million people will see their score change by 20 or more points because of it. Another 100+ Million could have a minor change in their score. That means almost everyone will be affected.

Your score may go up

Your score may go up, if you have a low percentage of personal debt. This is usually things like credit cards. Credit cards, because they are considered unsecured debt are more likely to be defaulted on. However, if you have a low amount of debt, people assume that you are working to pay your bills, and your score will increase because of it.

Your score may go down…

Your score may go down, if you have a few late payments, and/or a high amount of credit card debt. This could cause your interest rates to change (for the worse) and/or it be harder to rent an apartment, get a car loan, etc.

What to do if your score isn’t great?

The good news is, your score is not permanent. It can, and does, change on a regular basis. I check my score approximately once a month, and can see if move a few points one way or the other just because of normal fluctuations like if I had paid my credit card bill already or not.

Even with this change, the basics of getting a good score hold true.

First, pay down your debt. The snowball method, where you pay all of your bills at the minimum and then put everything you can into your smallest debt works well. Once the smallest is paid off, you can work on your next smallest, until they are all done.

This is a tried and true method, and works for both financial reasons as well as psychological – you feel good watching your bills disappear.

I’ve known people who’ve held garage sales, or worked a second job for a few months to get that extra money to start the process. Once the first debt or two is paid off, and you can use that money toward larger debts, you are well on your way.

Second, pay your bills on time. I know people who just forget to send in the check/pay online. They get busy with everything else going on, and forget. It has nothing to do with how much money they have.

For them, and maybe you if you are in this situation, consider auto-bill pay. Scheduling your payments, as long as you have the money to pay them, means no more late fees, and helping, not hurting your FICO score.

Finally, don’t spend more than you make. It’s easy to do, but its the most important step to get out of living paycheck to paycheck.

https://www.cnn.com/2020/01/24/success/fico-score-changes/index.html