If you’ve declared bankruptcy and are now fighting to rebuild your credit, you likely have learned all about the actions you need to take to raise your credit score over time. Recently, however, FICO announced that slight changes would be made when calculating a person’s credit score and that millions of Americans may find that their score changes.
What Is FICO?
FICO is the name of a company that specializes in “predictive analysis”. The company, which was originally named Fair Issacs Co. found that most people would natural shorten their name to FICO and made the change official years ago. FICO created the FICO score which is supposed to be an indicator of how a consumer may behave over time, providing companies with a basic way to determine the risk associated with lending a person funds.
FICO Announces New Credit Scoring Process
Starting in 2020, FICO will make adjustments to the way that a credit score is determined. Called FICO 10, the model will start to incorporate the level of debt that a consumer has in their model. This means that anyone who falls behind on loan repayments will be hit hard. The previous two years of credit scores will be weighed into the current score instead of just the previous month’s. In addition to this, consumers who take out personal loans will be flagged since personal loans are typically unsecured.
One interesting fact, however, is that financial institutions aren’t required to use this new model. Many use FICO 8 or 9 but thousands use even older models.
You Should Still Pay Attention To Credit Basics
The best way to protect your credit score and to continue rebuilding your credit is to stick to the credit basics. This includes:
- Making payments on time and in full. Even in the new model, repayment history will make up about 35% of your credit score.
- Keep your balances as low as possible. When you are able to obtain a credit card, don’t ever carry more than a 30% balance on it.
- Have a mix of types of credit. This could mean a mortgage, car loan, credit card, etc.
Here are a few of the common credit myths that you may have heard – and the actual facts.
- Checking your credit score will lower it. Checking your credit score is actually called a soft pull and it does not impact your credit. A hard pull is something that temporarily lowers your score – an action like applying for a new credit card.
- Income impacts my credit score. Your income is not on your credit score and does not impact it.
- Student loans don’t impact credit scores. This is absolutely untrue. Failing to repay student loans can ruin good credit.
- Debit card use can impact your credit score. Debit cards are not a form of credit and so using one will have no impact on your credit score. Even if you choose “credit” while checking out while using a debit card, it doesn’t matter.
Rebuilding your credit may seem like an insurmountable task but it can be done. Starting good financial habits is vitally important. For more information on rebuilding your credit, read this post.