How FICO 10 Will Impact You

When it comes to FICO 10, there aren’t many numbers in personal finance that are more crucial than your credit score. The financial ramifications of your score range from the loans you qualify for to the interest rates you’ll pay.

And just lately, it was revealed that the formula used to calculate FICO ratings is changing, placing more weight on total debt loads, payment histories, and different categories of debt. For those with credit scores above 680, according to FICO, this might mean a gain of 20 points, but those in financial difficulty may experience ever-sharper drops due to missed payments and huge balances. Let’s discuss what that might imply for you.

The Credit Ranges Are NOT Changing

The below-listed credit score ranges won’t change. Only a few of the computations that went into tabulating those scores have changed.

Credit scores essentially assess your likelihood of repaying a debt. They are used by businesses in lending choices because they are placing a calculated wager on whether they will receive their money back.

FICO or Vantage are essentially the only two companies that give credit scores (with the large majority of lenders using FICO). These businesses run the financial information of individuals through their in-house algorithms to generate the sole figure that makes up your score. But this is when the problems begin: Depending on the company crunching the numbers, your score will vary. Both offer a variety of scoring methods tailored to specific loan kinds.

Currently, a scale from 300 to 850 is used by FICO and Vantage. The likelihood that a borrower will repay their debt increases with higher credit scores. It’s important to keep in mind that only people with long enough credit histories are included on this scale.

What types of data are included in these scores? Criteria in the past have included:

Payment history
Amount of debt owed
Length of credit history
Recent inquiries for new credit applications
Types of credit used (credit, installment loans, etc.)
Available credit

How is FICO Changing with FICO 10?

FICO will begin implementing a new scoring system called FICO 10 T in January 2020. When determining scores, this model will take into account additional factors like:

Whether you’ve fallen behind or missed payments.
Whether you’ve taken out a personal loan, which is an increasingly popular form of unsecured credit.
Whether your total level of debt has increased or decreased over time.

VantageScore already evaluates this criteria, so your score there is unlikely to change.

The good news: Under FICO 10 T, borrowers with scores of 680 or higher who keep up their on-time payments may receive an increase of 20 points.

The bad news: If borrowers who are already having trouble—those with scores below 600—keep missing payments, their ratings might drop by around 20 points.

Remember again, lenders are not required to use the FICO 10 T model. They might decide to employ the FICO 10 method instead, which is more in line with the old scoring approach.

What is considered a good credit score?

We may describe and contrast various credit score ranges now that we are aware of what these scores evaluate. We’ll concentrate mainly on FICO score ratings in this essay. That’s because FICO scores are used in the great majority of financing decisions, making them the yardstick by which you’ll most likely be assessed.

Excellent Credit: 800+

In this credit score range, you can expect lenders to roll out the red carpet. You’ll be offered good terms and may even be able to negotiate for better ones.
An estimated 1% of borrowers in this credit score range will become delinquent on their loans.

Very Good Credit: 740 to 799

You can count on lenders to treat you well if your credit score falls within this range. You’ll be given favorable terms, and you could even be able to bargain for even better ones.
An estimated 2% of borrowers in this credit score range will become delinquent on their loans.

Good Credit: 670 to 739

You should expect to acquire credit in the majority of cases if you have credit ratings in this range, which are similar to the national average. The amount of interest you must pay may, regrettably, not make you happy.
An estimated 8% of borrowers in this credit score range will become delinquent on their loans.

Fair Credit: 580 to 669

Consumers in this group might struggle to get credit. They will have much higher interest rates than the majority of borrowers when they do.
An estimated 28% of borrowers in this credit score range will become delinquent on their loans.

Poor Credit: 579 and lower

Those looking for loans with scores in this range are frequently turned down by prospective lenders. They can be required to pay fees up front to cover lending risks in order to obtain even small loans.
An estimated 61% of borrowers in this credit score range will become delinquent on their loans.

How your score affects what you pay

These ranges are a useful starting point for evaluating your credit health, but lenders pay much closer attention to particular score levels. We wish to offer some verifiable proof of how credit ratings affect your financial destiny. Let’s look at how much your credit score may cost you if you apply for a mortgage, even though each business evaluates various factors.

Suppose you want to buy a home for $200,000, a modest purchase relative to the median price for new homes sold nationwide. You sign up for a 30-year fixed-rate mortgage.
If your credit score were 760 or better, here’s an estimate of what you’d pay:
- 3.6 percent APR
- $907 monthly payment
- $126,617 total interest over your mortgage term.
On the other hand, if you had just “fair” credit, your terms would be far less appealing. If your credit score fell between 620 and 640, you’d be looking at the following:
- 5.2 percent APR
- $1,095 monthly payment
- $194,071 in monthly interest

In this example, the better score would save you almost $200 a month, and nearly $70,000 in the long run. With numbers like these, there’s no denying the importance of your credit score range.

Most Common Credit Scores

You now understand how to categorize your credit and how this affects how much interest you pay over time. However, you undoubtedly want to know how you compare to the rest of America. The ranges aren’t always equivalent, after all: Although an 800 or more may be considered “outstanding,” theoretically, 50% of Americans could fall inside that range. On the other hand, the lenders in the nation may view the majority as having bad credit.

We analyzed the FICO data to find out how common different ratings are in reality. The average credit score in America in 2017 was 700, which is firmly in the “excellent” credit range. Here’s a closer look at how Americans’ scores were distributed before the FICO change in January 2020:

300–499: 4.7% of population
500–549: 6.8% of population
550–599: 8.5% of population
600–649: 10.0% of population
650–699: 13.2% of population
700–749: 17.1% of population
750–799: 19.0% of population
800–850: 20.0% of population

If the percentages change under the new FICO model, only time will tell. The bulk of the nation was, however, concentrated at the top of the credit scale in recent years. However, if you belong to one of the categories with lower scores, know that you are not the only one. A whopping 5% of the American populace still provides plenty of company.

Mission: Improvement

If your present credit score range doesn’t satisfy you, you’re not destined to live with bad credit indefinitely. Fortunately, if you behave responsibly as a borrower, your score can improve, giving you access to better conditions in the future.

Rethinking Your Score Range

We hope this advice makes the interest implications of your credit score clear, no matter which bracket it now resides in. The information we’ve provided may not seem like particularly encouraging news, but it might be useful to understand how much your credit score may be costing you. Even if you’ve previously handled your credit poorly, there’s no need to assume that your score is fixed. You can create a body of evidence through regular and timely payments that will persuade lenders to view you and your credit score differently.

Learn more about how to improve your credit score here.

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