As a Travel Hacker, I always know my credit score. Recently, I learned of some adjustments to how FICO, Fair Isaac Corporation, will be determining credit scores. Banks and lending institutions use credit scores to evaluate a borrower’s creditworthiness. If you currently don’t know your current credit score, you can sign up for a free account at CreditKarma.com. Note: I am not an affiliate of CreditKarma. There, you will see your credit scores and credit reports from two of the three major credit scoring bureaus. Read on to learn about FICO credit score changes and how your credit score might be affected in the future.
Credit Score Basics
Here are the five key elements in credit scores:
- Payment History
- Length of Credit History
- Credit Utilization
- New Credit Inquiries
- Credit Mix
You can learn more about the details of each of these in this post. For now, we are interested in the specific changes that FICO will make to how it determines credit scores. One thing to note is that many but not all banks and lending institutions rely on FICO to make decisions about extending credit.
FICO 10 and FICO 10T
The changes coming to FICO scoring are the first since 2014. The new models are known as FICO 10 and FICO 10T. These new scoring metrics will take a harder stance on late payments and debt. They will also look more closely at historical information such as credit balances and payment amounts.
The five categories listed earlier will still weigh heavily in the scoring metrics. However, for the first time, FICO will look at Trended Data also known as Time-Series Data. The time frame examined will be 24 months. FICO will look at whether or not you pay your debt in full each month. People who pay in full are Transactors. If you carry a balance from month to month, you’re a Revolver.
(Note that in order to benefit from using credit card points and miles as a travel hacker, you must have zero credit card debt and pay your credit card bill in full each month.)
As a transactor vs a revolver, travel hackers will be looked at as better credit risks. So this change to the scoring models will likely help our credit scores.
The other area of trended data addressed in the new scoring models is about credit card balances. Are you maintaining, increasing or decreasing your overall balances over time? Lenders feel better when they see you are not increasing your credit usage. I always recommend that you do not spend more than what was typical for you before getting into travel hacking.
Late Payments- Ouch!!
Responsible credit card usage means paying every credit card balance in full and on time every month. For those people with late payments, the new scoring models will lower your credit score. Again, this is not a factor for those of us in the travel rewards hobby.
FICO 10 and FICO 10T will place more emphasis on credit utilization. The definition of credit utilization is the percentage of outstanding credit that the borrower is currently using. As we travel hackers acquire more credit cards, lenders generally extend more credit to us. This lowers the credit utilization ratio which the lenders like to see. With the new scoring, this will help our credit scores.
The Bottom Line
Not all banks and lending institutions will adopt the new scoring right away. If you have a good credit score under the current FICO scoring system, your score is likely to go up under the new system. Conversely, those who currently have lower credit scores may see a lowering of their scores when the new models go into place this summer. Keep paying your credit card balance in full every month. Open new credit card accounts strategically to meet your travel needs and goals. There you have it. The new FICO score changes will not have much impact on your credit score as a responsible travel hacker.