What FICO’s New Algorithm Means for Loan Approvals This Year

FICO’s New Algorithm

“Credit is a system whereby a person who can’t pay gets another person who can’t pay to guarantee that he can pay,” said Charles Dickens.

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This timeless observation takes on new meaning as Fair Isaac Corporation rolls out its latest credit scoring changes. These changes will reshape how lenders evaluate your creditworthiness.

Your credit score is about to experience its biggest transformation in years. The FICO 10 model, announced on January 23, brings sweeping changes to credit scoring. It will affect approximately 110 million Americans.

This new algorithm examines your financial behavior over the past 24 months with unprecedented detail. It creates a more complete picture of your credit habits.

The loan approval impact will be immediate and significant. About 40 million people will see their scores jump by 20 points or more. Another 40 million face similar decreases.

These credit scoring changes mean the difference between qualifying for a mortgage or facing rejection. They also mean the difference between securing low interest rates or paying thousands more over the life of a loan.

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The average FICO score recently reached a record high of 703, but this milestone may be short-lived. The FICO 10 model introduces trended data analysis through its 10T version.

It tracks your account balances and payment patterns over time rather than capturing a single snapshot.

This shift fundamentally changes how lenders will view your financial stability and loan approval impact in 2024 and beyond.

Understanding FICO’s New Algorithm and Its Impact on Credit Scoring

The FICO score algorithm has been the top choice for credit checks since 1989. Your score ranges from 300 to 850, showing lenders how reliable you are financially.

The newest version brings big changes, affecting how your money habits influence loan decisions.

FICO 10T changes how it looks at your credit habits. It doesn’t just check your credit at one time. Instead, it looks at your financial habits over 24 months. It sees if you pay down balances or let them grow.

This new way of checking credit means your score shows how you handle money, not just what you owe. The FICO 10T trended data shows if you’re getting better with money or falling into debt.

John Ulzheimer says good credit habits will boost your score, while bad ones will lower it.

“The difference between someone who pays their credit card in full each month versus someone who makes minimum payments will become much more pronounced in the scoring model.”

These updates keep the FICO score algorithm up-to-date with changing financial habits and the economy.

Lenders now have a clearer view of your financial trustworthiness, making their decisions more accurate than ever.

Also read: Habits That Secretly Lower Your Credit Score

Major Score Fluctuations Expected for Millions of Borrowers

FICO’s new algorithm will affect 110 million consumers this summer. Your credit score could change a lot based on your recent money moves.

Dave Shellenberger, FICO’s Vice President of Product Management, says missing payments or maxing out credit cards will lower your score.

The new system will make score differences bigger. If your score is between 670 and 739, you have good credit. But scores under 580 are considered poor. This gap will grow under the new rules.

About 40 million people will see their scores go up by 20 points or more. Another 40 million will see their scores drop by similar amounts. Carrying credit card balances can hurt your score, even small ones.

“The severity and recency of your financial missteps will determine how far your score falls,” according to industry analysts reviewing the new model.

Your score depends on several factors. Late payments and high credit use are now more important. The algorithm looks at your financial history over two years. Every transaction affects your score.

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How Your Payment History Over 24 Months Now Matters More

FICO’s New Algorithm has made your payment history even more important. It now looks at your credit behavior over the last 24 months in great detail. It tracks every payment and balance change for the past two years.

This change marks a big shift in how credit is evaluated. Before, recent activity was key. Now, the focus is on consistent financial habits. Paying down credit card balances steadily is now a big factor in your credit score.

The new system looks at trends, not just one-time events. If you’ve been paying down debt regularly, your score will show it. But, having high balances even with regular payments can affect your score in new ways.

Credit FactorWeight in ScoreWhat It Measures
Payment History35%On-time payments over 24 months
Amounts Owed30%Balance trends and reduction patterns
Credit Mix10%Variety of account types
New Credit10%Recent inquiries and accounts
Credit Length15%Age of oldest and newest accounts

This new approach gives lenders a clearer picture of your financial habits. Every payment decision you make today influences your credit score for the next two years. So, making consistent good choices is more crucial than ever.

The Widening Gap Between Good and Bad Credit Scores

FICO’s new algorithm makes it clear who is financially responsible and who is not. Being on the right side of this credit score gap is more important than ever. It shows who is managing their money well and who is struggling.

credit score gap visualization

The difference between good and bad credit is now more obvious. Good credit ranges from 670 to 739, and bad credit is below 580.

Most people have scores between 670 and 739, which is considered good. But, new rules make it easier for scores to drop if you have late payments or high credit card balances.

Credit CategoryScore RangeImpact Under New Algorithm
Excellent740-850Higher scores, better loan terms
Good670-739Moderate improvement possible
Fair580-669Slight downward pressure
PoorBelow 580Significant score reduction

This new gap in credit scores affects what financial products you can get. If you have good credit, you might qualify for top rewards cards like the American Express Gold Card.

But, those with lower scores will find it harder to get good rates. The system now rewards steady payments more and punishes mistakes more than before.

What This Means for Your Mortgage Application Process

Your mortgage FICO scores are changing, affecting how lenders see your credit for a home loan. New scoring models mean a big change in how loans are approved.

It’s important to know this before you apply for a mortgage.

FICO has launched the FICO Score Mortgage Simulator with Xactus. This tool helps mortgage pros check your loan options.

It works with the classic FICO Score versions 2, 4, and 5 used in mortgage lending. Your lender can test different credit scenarios with one, two, or all three major credit bureaus before deciding on your loan terms.

The tool uses real FICO Score algorithms to show how different credit actions might change your score.

This means your lender can see how paying off a credit card or closing an account could affect your mortgage FICO scores. This clarity helps you know what actions can boost your approval chances.

Credit BureauFICO Score Version UsedTypical Score Range Impact
ExperianFICO Score 25-25 points
EquifaxFICO Score 58-30 points
TransUnionFICO Score 410-35 points

FICO’s New Algorithm mortgage impact goes beyond just checking your credit. Lenders now look at your financial behavior patterns more deeply.

This makes the loan approval process more detailed but could be better if you show consistent responsible credit use.

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Strategies to Improve Your Score Before the Changes Take Effect

Acting now can greatly improve your credit score. The new FICO algorithm values consistent payments more than ever. Your payment history is 35% of your score, so set up automatic payments to avoid late fees.

Optimizing your score starts with managing your credit use. Pay off balances fully each month to keep your use rate low.

This rate compares your debt to your credit limits. For the best score, aim for a use rate under 30% on each card and overall.

credit management strategies for score improvement

Timing is key to boosting your score. Each new credit application can lower your score by up to five points. Only apply for accounts you really need.

Use balance transfer cards like the Citi Simplicity Card for 21 months at 0% APR to pay down debt without interest.

ActionImpact on ScoreTimeframe
On-time paymentPositive (35% weight)Immediate
Lower utilization to 10%+20-30 points1-2 months
Keep old accounts openPositive (15% weight)Long-term
New credit inquiry-5 pointsTemporary

Use free services like Experian’s FICO Score 8 or FICO Score Open Access to track your score. Regular monitoring helps you spot errors quickly and see the results of your efforts.

The Rising Cost of Credit Checks and Its Effect on Borrowers

Getting a mortgage just got pricier. In November 2024, FICO raised FICO fee increases that hit your wallet hard.

The fees for mortgage scores went up from $3.50 to $4.95 per score, a 41% jump. This increase adds to your mortgage costs.

The cost of credit checks has been rising for years. In 2018, it was just 10 cents per score. By 2022, it had risen to 60 cents to $2.75. Then, in late 2023, it jumped to $3.50 before reaching today’s $4.95.

YearFICO Score CostIncrease from Previous
2018$0.10
2022$0.60 – $2.75500% – 2,650%
Late 2023$3.5027% – 483%
November 2024$4.9541%

FICO’s New Algorithm pricing has raised eyebrows. CEO William Lansing says these hikes are long overdue.

But, Senator Josh Hawley and the Community Home Lenders of America want to look into it. They think it might be unfair. Even former CFPB director Rohit Chopra called it price gouging.

Credit bureaus pass these higher fees to lenders, who then pass them to you. With other mortgage costs, these fees make buying a home even harder in today’s pricey market.

Conclusion

FICO’s new algorithm brings big changes to how your credit score is calculated. It affects about 110 million Americans, with scores possibly changing by 20 points.

This new system looks at your payment history over 24 months and how your credit card balances change each month.

The gap between those with strong credit and those with poor credit will grow. Your credit score management strategy needs to change.

Pay all bills on time and keep credit card balances low. Don’t close old credit cards, even if you rarely use them.

The FICO Score Mortgage Simulator gives lenders new tools. They can check different scenarios before approving loans. This means they’ll look at your financial habits more closely than before.

Start preparing for loan approval now, before these changes happen. Credit check fees have jumped 41% to $4.95 per score.

This adds extra costs when you apply for loans. Your future creditworthiness depends on what you do today.

Begin building better credit habits right away. Check your credit reports from Experian, Equifax, and TransUnion for errors.

Set up automatic payments to avoid late fees. These steps will help you stay in good standing when the new scoring system takes effect.

FAQ

When will FICO’s new algorithm be implemented?

FICO 10 and FICO 10T scoring models will be fully implemented later this summer. They were introduced in 2020. But, it takes time for lenders to update their systems.

How many people will see their credit scores change?

About 110 million consumers will see changes in their credit scores. Around 40 million will see scores go up by more than 20 points. Another 40 million will see scores drop by similar amounts.

What is the main difference between FICO 10 and FICO 10T?

FICO 10T looks at your credit behavior over 24-plus months. It checks how you’ve paid down credit card balances over time. FICO 10 just looks at your current credit situation.

Will the new algorithm affect my existing loans?

No, the new FICO algorithm won’t change your existing loans. But, it will affect your ability to get new loans and the interest rates on future credit applications.

Which consumers will be most negatively affected?

Consumers with recent delinquencies or high credit utilization will see score drops. Those carrying credit card debt month to month will be especially affected by the new 24-month balance analysis.

Can I check which FICO version my lender uses?

Yes, ask your lender which FICO scoring model they use before applying for credit. Mortgage lenders often use older versions. Credit card companies might use newer models. You can get your FICO Score 8 for free through Experian.

How much have credit check fees increased?

FICO raised wholesale royalty fees for mortgage-related credit scores by 41% in November 2024. Fees have gone up from 10 cents in 2018. Lenders and borrowers now pay more for credit checks.

What’s the fastest way to improve my score before the changes?

Make all payments on time (35% of your score). Pay down credit card balances to lower your utilization rate. Use balance transfer cards like the Citi Simplicity Card for 0% intro APR. Avoid new accounts, as inquiries can lower your score by five points.

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