The New FICO Score Calculation
Submitted by Bond & Devick Wealth Partners on February 5th, 2020There have been recent changes to the FICO score calculation. FICO stands for Fair Isaac Co., which uses one of three credit reporting agencies (Equifax, Experian, or TransUnion) to create the FICO score. The FICO score is used by lenders to determine the ability of an individual to pay a loan back. The FICO score is used to apply for mortgage, car loans, among other debt instruments.
The last change to the FICO score was five years ago. The new calculation now takes personal loans into consideration. In the previous version of the FICO credit score calculation, if an individual had a high credit card balance and completed an offer to consolidate their debt with a personal loan, their FICO score would go up. By doing this consolidation, this may help this individual be accepted for additional debt (mortgage, car loan, etc.). However, by transitioning the amount from a credit card to a personal loan didn’t change the amount of debt for that individual.
Different sources speculate this may increase or decrease an individual’s FICO score. It is estimating to increase FICO scores for individuals that already have higher (above 580) and may decrease for individual below 580. Even though the change to the FICO is occurring this year, it normally takes lenders months if not years to accept the new FICO calculation.
