Changes are coming to your FICO score calculation

Fair Isaac, the company behind your FICO score, is changing the way you calculate a person’s credit. Although this could increase millions consumer credit scoresit could pose problems for people struggling with debt.

FICO 10, as the new credit score model is called, will increase credit scores from about 40 million Americans to 20 points, although most consumers will only see a modest impact or no change, according to the company. Another 40 million are likely to see their score drop. The changes are expected to take effect this summer.

Lenders use a person’s FICO score or other credit metrics, such as VantageScore, to assess whether a borrower is solvent. In another notable change, the new calculation will take into account personal loans, FICO said, including from the time they are issued and consumers begin to repay until the loan goes into collection.

FICO 10 will also examine payments and consumer bills over a longer period of time, an effort to “smooth the peaks and valleys” in a person’s financial history, said credit industry analyst Ted Rossman of CreditCards.com.

For lenders, examining a person’s financial movements for several months provides a better picture of their credit history, said Matt Schulz, an industry analyst at CompareCards.com.

“It’s like when your child wants to borrow car keys,” he said. “If the child has treated them responsibly for months without incident, you will feel good to deliver them. If your child has done well, but also has a speeding ticket and some curfews lost during the ‘last year, you may not be as confident.

Rossman said assessing people’s credit over an extended period of time benefits both lenders and borrowers.

“A temporary increase in spending, such as a vacation or holiday shopping, won’t hurt your credit score as much if you generally keep your credit utilization low,” he said. “Instead of staying too aware of which model a particular lender is using, consumers should practice good core habits, such as paying their bills on time and keeping their debts low.”

According to CreditCards.com, credit cards have an average interest rate of approximately 17% for all account holders and about 24% for those with poor credit. Credit cards can be paid at any time to avoid additional interest, but term debts such as personal loans have established monthly payments and there is no bonus to pay in advance.

In addition, term loans usually do not offer reward points or offer the same degree of protection against fraudulent sales as credit cards.