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Lenders began using the FICO credit score in 1989. Since then, they’ve relied on this system to determine those borrowers who are most likely to repay their mortgage, auto and other loans on time. Those with the highest credit scores — generally above 720 — are rewarded with those lowest interest rates on their loans.
Today, lenders are using a new version of this score, the FICO 8. For consumers, little has changed: The way to a high credit score still involves paying monthly bills on time, keeping credit card balances low and opening new credit card accounts only when necessary. What has changed, though, is how the FICO 8 score punishes and rewards certain financial behaviors.
Note: You can check your FICO 8 score here..
According to myFICO, the consumer Web site run by FICO, more than half of consumers’ new FICO 8 credit scores will be off no more than 20 points, either up or down, from their previous FICO scores. This is by design: The FICO 8 credit score represents a tweak of the old scoring system, not a complete overhaul.
Under the new scoring system, consumers who run up their credit card balances will see their scores drop more severely. The FICO 8 score does not like high credit card balances.
However, the new score is more forgiving when it comes to isolated late payments. Consumers who make one or two late payments only will not see their credit scores drop as severely as they would have under the older FICO scoring system.
But the news is the opposite when it comes to consistent late or missed payments. Consumers who make it a habit to pay their bills late will see their credit scores fall at a more dramatic rate than they would have with the old scoring system.
The FICO 8 scoring system also ignores nuisance collections. These collections are defined as those for less than $100.
For consumers, then, the FICO 8 credit scoring system means few changes. They’ll still need to practice sound spending habits if they want their credit scores to remain strong.
Unfortunately, a growing number of consumers seem to be struggling with this. A recent study by FICO found that 25 percent of consumers had FICO credit scores under 600. That qualifies as a terrible score. Most consumers with such weak scores, for instance, will never be able to qualify for a mortgage loan from conventional lenders. Instead, they’ll have to seek out the help of pricier subprime lenders or take out a loan insured by the Federal Housing Administration.
Consumers who desire a strong credit score needn’t worry about the changes brought about with the FICO 8 scoring system. Instead, they should take a long look at their own spending habits.