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- FICO has made significant changes to the way the most widely used credit score in the nation is calculated.
- The new system will more strictly penalize borrowers with large amounts of debt or those who have fallen behind on loan payments.
- Tens of millions of Americans who have struggled to pay off debt are expected to see lower credit scores in the coming months.
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Tens of millions of Americans who have struggled to pay off debt are expected to see lower credit scores following a change to the way the most widely used credit score in the nation is calculated.
Under a newly announced system, FICO scores will more strictly penalize borrowers with large amounts of debt or those who have fallen behind on loan payments. It also includes stricter monitoring of those with personal loans, an unsecured type of debt that has become increasingly popular in recent years.
Fair Isaac Corp., the creator of the system, said the changes could affect upwards of 110 million individuals on both ends of the scoring spectrum. For those with credit scores above 680, credit scores could actually increase as a result. Basic FICO scores range from 300-850.
“These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers,” Fair Isaac said in a statement.
But borrowers with scores below 600 are likely to see sharper FICO score penalties than under the previous system if they accumulate additional debt or continue to payments.
Younger borrowers or those with limited credit histories could see the biggest changes under the new system, said Cristian deRitis, the deputy chief economist at Moody’s Analytics and an expert on consumer credit.
“If lenders focus their approvals on the top tier of borrowers, it may be difficult for these consumers to establish a history in order to access credit in the first place,” deRitis said. “It’s analogous to young workers who find it difficult to obtain a job when all jobs require experience.”
Consumer debt has skyrocketed to record levels in the decade-long expansion, fueled by loans for higher education and cars. Still, overall delinquency rates remain relatively low in the US.