Although there are differences between the models, credit scores will likely stay high. Also, poor scores will not go away. Each credit scoring model uses a different method for calculating your score. All of them have the same goal, predicting credit risk. This will affect your credit score.
New credit scoring model
All three credit reporting agencies will have access to the new FICO10 credit scoring model by 2020. It is expected to increase credit scores of 40,000,000 consumers while lowering scores of another 110 million. It uses trend data to predict the likelihood that a consumer will default. A consumer with a history of good payments and a low amount of debt will generally score higher on FICO than one with a high level.
FICO10 uses a multidimensional approach in credit scoring. It includes trends data on revolving amounts, minimum payment requirements, amount paid toward dues. These data points allow the FICO 10 model identify consumers who pay their accounts on time. This approach also reduces impact of one single event. The result is that a single expense to pay for vacations won't have a major impact on your credit score. But, late payments and high-interest loans will.
Modifications to existing models
A number of new changes have been made to credit scoring systems since the recent release of FICO 10, the credit score model. New algorithms and data were used to calculate credit scores. On average, scores will rise by 20 points for nearly 40 million people. The changes are aimed at reducing disparities between the scores of consumers who have different credit histories.
One modification to the scoring model is the inclusion of trended information, which displays credit card or debt balances in the last 24 months. This information rewards responsible usage of credit cards while penalizing those who are late on payments. Also, it penalizes people with multiple debts or a high credit utilization ratio.
Non-traditional credit: Impact
FICO10 T uses data from more accounts that FICO10 Basic to calculate the new scoring algorithm. This data helps predict a borrower's credit risk more accurately than the basic FICO 10 score. A basic FICO score only looks at a snapshot of a consumer's credit report at one point in time. Trend data is particularly useful for the credit utilization segment of the score. Credit scores were based on the payment history for the past seven to ten year. The rising balance will affect a borrower’s score.
The new model uses the average usage rate for all credit accounts to calculate the average and average out the peaks. This means that millions of people can suffer from a 20% drop in their credit score due to a single account. Luckily, for renters who don't own their own home, they can rely on the landlord's credit data to determine whether or not they can borrow money.
UltraFICO(tm), scoring changes
Fair Isaac Corporation's credit scoring system UltraFICO was created. This score is especially relevant for consumers with limited credit histories or credit history and those who have had credit difficulties. Consumers with poor credit histories or recent financial difficulties will see their scores rise by 20 points under the new scoring system.
The new scoring system relies on more data that the FICO credit score. It also incorporates cash flow data from the consumer's bank accounts. While these data might not give a good indication of a consumer's creditworthiness or creditworthiness, UltraFICO can help increase credit access for everyone.