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by Next Avenue
February 14, 2020
by Next Avenue
February 14, 2020
Fair Isaac, the giant credit score company, recently announced the biggest change since 2014 in how it determines its FICO credit scores. This new FICO 10 system — expected to go into effect by year’s end — could affect your retirement in big ways, possibly for the worse and possibly for the better.
But there are a few things you can do to help prevent it from lowering your credit score.
Having good credit is especially important in retirement. It can save you thousands of dollars — with a lower interest rate on a mortgage, car loan or credit card — at a time of life when every penny really counts. And a high credit score could help you get a rewards credit card or a better interest rate with one, making travel in retirement less expensive. Insurance premiums, utility bills and apartment rents may also be more affordable when your credit is in good shape.
Conversely, having a poor credit score could keep you from getting a mortgage on a retirement home or raise your monthly expenses due to higher borrowing costs.
According to FICO, about 40 million people could see their credit scores rise 20 points or more with the new system. But another 40 million could see their scores drop 20 points or more. And about 110 million people could see their credit scores go up or down by under 20 points.
What’s behind FICO 10? Something known as credit score inflation.
A few years ago, due to a legal settlement, the three major credit reporting agencies (Equifax, Experian, and TransUnion) agreed to remove tax liens and judgments from credit reports. That caused millions of Americans to see a boost in their credit scores. The average FICO score climbed to an all-time high of 706 in 2019; scores typically range from 300 to 850.
But lenders weren’t thrilled with this development. Some argued the credit score increases weren’t deserved and could lead some people to get loans and credit cards they wouldn’t be able to pay on time.
According to FICO, a credit card issuer might be able to lower its number of defaults by up to 10% under the new scoring model, though. One reason: FICO 10 will put more weight on a borrower’s rising debt levels. So, if you switched from paying off your cards in full each month to carrying growing balances, you may well see a lower credit score.
Here are three ways the FICO 10 changes could hurt your credit score:
That said, many of the general rules you’ve learned about earning a good credit score still apply under FICO 10. For example, it will still help to pay your bills on time, keep credit cards open and review your credit reports for errors often.
But you may want to tweak your approach to credit management in light of the new scoring changes to come. Here’s how:
If you start following the good habits and steering clear of bad ones, you may be able to avoid potential credit score problems in retirement.