Recent changes to the FICO score, the most widely used credit score in the world, are likely to affect the score of millions of consumers, and even their ability to access a loan in the upcoming year. Why should you care about the new changes? Your credit score builds your credibility with lenders, and therefore the foundation of your ability to borrow money.
Fair Isaac Corp., the company responsible for creating the FICO score, designed the new system with the intention to help lenders better distinguish between borrowers with “bad credit” and borrowers with “good credit.” In previous years, lenders expressed their concern that borrowers’ credit scores weren’t accurately reflecting their ability to pay off their debt.
Updates to FICO occur every few years using data that analyzes consumer behavior and debt trends. The most recent changes, known as FICO 10, are expected to make it even more difficult for those who struggle to make their payments on time, or have a longstanding history with debt.
S0… What is FICO?
Credit scores can be a daunting topic, especially when it involves your own personal finances. There are many misconceptions exist about what can negatively or positively impact your credit score. Regardless, most can agree maintaining good credit is an essential component of planning for your financial future. Improving your credit is also important in order to establish a financial safety net which allows you to access a personal loan when you need one. Why do people take out loans? There are many reasons to take out a loan, but the most common are applying for a mortgage, auto loan, or a personal loan to pay off an unexpected emergency expense.
Fair Isaac claims that FICO is used in 90 percent of lending decisions. That’s right, 90 percent. So, if you’re applying for a loan, it’s very likely the lender will consider your FICO score when deciding if you are eligible. Therefore, it’s important to be aware of your credit risk and personal debt as you take a look at how your credit might be affected by these new changes.
Let’s dive into some general (but fundamental) information about FICO scores. Credit scores are measured numerically from a range beginning at 300 – the lowest, to 850 – the highest. A new report from Experian released that the average FICO score for Americans was 703 in 2019 – pretty good. To most lenders, a score of 700 or above is considered to be a good indication of a trustworthy borrower. A good credit score in combination with other financial factors, often yields lower interest rates and more lending opportunities for those applying for a loan. You can think of a credit score as a way for lenders to measure your credibility as a borrower.
How Will Your Score Be Affected?
The bad news is, the new score will judge those who fall behind on payments more harshly. If you have a low credit score, which is normally any score below 600, lenders will be apprehensive to give you a loan. You will encounter higher interest rates or higher insurance premiums. And the worst part? When people don’t have access to secure loans, they often resort to payday loans and predatory lenders to solve their financial problems.
Payday loans are often used by people who have poor credit and are unable to borrow money from a bank or other traditional lender. No credit check is required for a payday loan, the characteristic responsible for enticing most borrowers to use them. So, if there’s no credit check required… what’s the problem?
Well, at a glance, payday loans may seem like a solution to your financial problems, but the majority of borrowers who use them often find it difficult to pay off the loan, with interest rates as high as 500 percent. Financially vulnerable people then get trapped in a cycle of debt while trying to pay off emergency expenses such as a car repair, or even daily living expenses. This explains why, according to CFPB, 80 percent of payday loans are taken out within two weeks of repayment of a previous payday loan.
What You Can Do
The good news is, TrueConnect offers a safe alternative for those who don’t have great credit, or even no credit score at all. There’s no credit check used for a TrueConnect loan, employees can borrow from an FDIC insured federal bank and make easy repayments over the next twelve months through convenient payroll deduction. All of the payments are reported to the credit agencies to help you establish a credit history or repair your current one. Eligible employers can offer their members of staff TrueConnect loans at no cost to themselves.
If you want to get a better perspective on your current financial status, TrueConnect also offers a Complementary Financial Wellness Analysis. It’s helpful to know exactly what your credit score is so you can take steps toward building your credit and working towards a brighter financial future.
