The most widely used credit score in the U.S. is changing the way it calculates consumers’ scores and could make it more difficult for some Americans to obtain loans, according to a new report.
Fair Isaac Corporation, the creator of FICO scores, will begin evaluating consumers with rising debt levels and those who fall behind on loan payments more harshly, The Wall Street Journal reported. It will also flag some consumers who take out personal loans, a category of unsecured debt that has climbed to levels not seen since the financial crisis, according to data from Equifax.
Fair Isaac did not immediately respond to a FOX Business request for comment.
In 2019, credit scores in the U.S. reached an all-time high of 703, up from 701 a year earlier and 14 points higher than in 2010, according to a recent report from Experian. The improvement in scores largely reflected the positive changes that consumers adopted; over the past 10 years, late-payments and delinquency rates have steadily dropped.
Credit scoring and reporting companies also started factoring in information like bank account balances and utilities payments to help give consumers with limited credit histories a better shot at getting loans.
For the average American going from a “fair” credit score, which ranges from 580 to 669, to a “very good” score, between 740 and 799, can save them up to $41,416 in total interest paid over the life of their mortgage loan, a recent LendingTree study found. A better score can also result in better interest savings for credit cards, personal loans, auto loans and student loans.
The FICO changes are coming in the midst of the 11-year economic expansion, a record, and solid consumer confidence, which neared a historic high in the fourth quarter of 2019. But it reflects a turn in lenders’ confidence in the economy.
“There are some lenders that see there are problems on the horizon in terms of consumer performance or uncertainty [about] how long this [recovery] is going to go,” David Shellenberger, vice president of scores and predictive analytics at FICO, told the Journal. “We definitely are finding pockets of greater risk.”
Although consumer loan losses remain low compared to the previous recession, consumer debts are at record highs.
FICO updates its scoring model every few years to reflect changes in consumer borrowing behavior and performance. It takes into account factors like payment history, credit usage, length of credit history, credit types and recent credit inquiries.
According to the Journal, the changes could lower scores for consumers who have a high “utilization” ratio — the amount of credit you use compared to your credit card limits.