The FICO credit score, that all important measure of your creditworthiness, is changing. Fair Isaac, the company that creates the algorithms that drive the scoring this week announced that they are making the scoring more strict, especially when it comes to late payments and the amount of debt that an individual carries. Don’t panic though. With some consideration and planning, the impact of these changes can be minimized.
It is important to remember that this is nothing new. Fair Isaac makes changes when the greater credit environment changes. Most of what is being reported in this case center around the increased debt loan that many Americans are carrying and that the current scoring is not a good reflection of how that debt can impact a person’s ability to service that debt. Additionally, a late payment may be more of a harbinger of problems than previously considered. Regardless of the what and why, it is the how that matters. How will this impact you?
People with excellent FICO credit scores should be unaffected. If you are not making any major purchases and don’t carry big balances, the result will be negligible. If, however, you are under a 700, I would say that you should take the approach that this would have a negative impact. This can impact rates of current and future credit, as well as the availability of loans for auto and home borrowing, so you need to prepare.
As a SplitReady Divorce Credit Pro and Certified Credit Repair Specialist, I recommend the following steps to manage this severe change and minimize the impact on your FICO credit score.
1. Request a Free Annual Credit Report
If you have not already requested your free annual credit report, you should do so. Completely review it for accuracy as well as to identify places for improvement. This is actually no different than what you should be doing annually or during important life changes, such as divorce, but with the change in weighting that Fair Isaac announced the strategies may change a bit.
2. Verifying Your Bigger Purchases
If you are shopping for a large item, such as a home or a car, you should re-verify your assumptions, especially for pre-approvals. The terms may change with a new credit score and, in the worst cases, your approval may no longer be valid. In situations such as divorce where you are either negotiating terms for disposition of the home or you are already under an agreed upon timeline, the validity of any discussions with lenders could be impacted, so you should check in.
3. Pay Debt On Time
Ensure that you pay on time for any debt. As always, this is intuitively obvious, but you would be amazed at what I see on a daily basis. If this is a resource issue, there is not much that you can do, but, if you do not have a good method to pay you bills by the required date, it is time to get some discipline. Creditors generally do not care why you are late and will report late payments even if it is because you had the money but forgot to pay on time.
4. Utilize Your FICO Credit Score
Manage your credit utilization. The amount of credit available and the credit used is one criteria that is getting weighted more heavily. This becomes especially critical in times of turmoil when credit can fill the gaps, such as divorce. The credit profile of many of my clients changes dramatically during a divorce, as an example, and they take a commensurate hit on their score. It is imperative that you utilize credit during these times understanding this and that you have a debt exit strategy to eliminate it as soon as possible.
Credit scoring as much as we hate it sometimes is a fact of modern life. Any time that there are changes, it can be frustrating as it seems that the creditors are moving the goal line. In reality, credit management should be part of your financial health. You should regularly be reviewing and analyzing your credit profile to optimize the score. This will minimize the impact of future changes that Fair Isaac throws at us.