Manny S. Rizzuto

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Approximately 110 million Americans will see their credit score change in the upcoming month due to FICO launching a new scoring model this summer called the FICO Score 10. The new model will focus more on consumer’s account balances and potential missed payments over the past two years. An estimated 40 million consumers will see their scores drop by an average of 20 points as a result of the new scoring model.

How it Works

FICO’s new scoring model is designed to weigh delinquencies, especially those that have occured in the past two years, more heavily than past models. The new model will be putting those with late payments on their history as well as those that have a history of high utilization ratios (the amount of credit you use vs. what you have available) at a disadvantage. It will also flag consumers that apply for personal loans, which are generally considered riskier than other financial options. 

How it Affects Your Mortgage 

According to Fair Isaac Corp., the company behind FICO scores, the new model should reduce defaults significantly, particularly for lenders who issue mortgages. Fair Isaac reports that, “the reduction in defaults is even higher for newly originated mortgage loans, at 17% compared to the FICO score used in that industry.”

If and when lenders do begin to use the FICO 10 model to evaluate mortgage applicants, potential homebuyers will need to take extra steps to prevent late payments, which could negatively impact their score, leading to higher interest rates and less favorable loan terms. However, a higher score can mean a lower rate, which can save you thousands over the life of your home loan. 

Those preparing to buy in the near future should start paying attention to their credit habits now, especially because the new model pays attention to your credit history over a longer period of time. With the new scoring model, consistency is everything. 

The biggest takeaways are to pay your bills on time and keep your credit utilization rate as low as possible. 

For those that already own a home, you may be able to take advantage of the new scoring model when refinancing. If you’ve been making payments on time, your score could get a boost under the new model, which would allow you to refinance under a lower rate.