FICO scores are changing, and consumers care

January 30th, 2020 | Lily Harder

FICO’s new 10 Suite credit score model made headlines last week with reports that millions of consumers will see changes to their FICO score in the coming months. This new model promises “increased predictive power” and deeper insights into an individual’s credit management skills. We’ve seen updates from FICO (and the other bureaus, for that matter, such as Experian’s launch of Experian Boost in March 2019) in the past, but this update seems to be making a particularly loud splash with the media, and there’s a good reason why: never before have consumers cared this much about their credit scores, let alone how those scores are calculated.

Consumers care about their credit score

U.S. consumers reached some new milestones recently. Not only are consumers carrying the largest debt burden in our nation’s history (nearing $14 trillion), but according to Experian’s 2019 Consumer Credit Review, the average FICO score hit a record high of 703 in 2019, up 2 points from 2018 and up 14 points from 2010. In another Experian study, 72% of consumers indicated that their credit score is important or very important to them. It stands to reason that as consumers take on more debt they are also paying more attention to their credit scores and working harder to increase them. The way consumers track, manage, and apply for new forms of credit is rapidly changing, and the ability to monitor credit scores so closely (and for free) is generating increased awareness around the transactions that drive those scores.

But, despite the increased awareness of and access to credit scores, consumers still struggle to understand how their credit scores are calculated. Mintel research on perceptions of credit and credit monitoring found that the majority (66%) of consumers check their credit scores at least a few times a year, with 44% of respondents stating that they check at least once a month. At the same time, 35% have trouble understanding how their score is calculated.

The US debt problem 

The biggest change to the new FICO score is the more accurate assessment of one’s ability to effectively manage debt repayments, which is an important update given the growing popularity of personal loans as a means to consolidate credit card debt. FICO does this with the introduction of FICO’s 10T data, which brings a trended view of a borrower’s past financial behavior rather than just a snapshot in time. This will reward consumers who have consistent and on-time payment histories.  

According to Mintel research, more than 10% of consumers currently have a personal loan, and a third of those who acquired a personal loan did so in order to refinance other debt. Compared with the previous model, FICO’s new scoring algorithm is going to react differently depending on the type of debt and the balance. For example, credit card debt and personal loans, otherwise known as revolving debt, will negatively impact one’s score more than they did previously, while installment debt such as a mortgage or student loans will not. 

Encouraging financial responsibility

Easier access to credit can provide a world of opportunity for someone just starting out on their financial journey. But the growing volume of outstanding debt in our country is fundamentally altering consumer attitudes and behaviors. Traditional life stage milestones such as buying a house or starting a family are increasingly put on hold because incomes are barely enough to keep up with daily living expenses let alone paying down debt. FICO’s latest update is another reminder that consumers still need help in making responsible financial decisions around debt. This is an opportunity for banks, credit unions, and even brands outside of financial services looking to increase engagement with existing customers. But that engagement must begin from a place of education, guidance, and proactive recommendations.

What we think

Credit scores are a living, breathing barometer of financial health and consumers want to play an active role in changing their score for the better, which means a better understanding of how everyday decisions will impact those scores.

Credit monitoring and credit building tools are table stakes for financial institutions expecting to be a part of their customer’s financial journey for the long haul. However, the education efforts behind those tools must fill the gaps in knowledge around credit score calculations, while proactive guidance and recommendations would make an even bigger impact on loyalty and engagement. Spelling out specific scenarios for your customers, as well as the short- and long-term impact those scenarios will have on one’s credit score, will go a long way in communicating the lifetime value of a particular product or service.

FICO’s latest update is a reflection of the changing landscape of debt in our country. Hefty outstanding loan balances are still a factor, but now responsible repayment behavior (or lack thereof) will also contribute to scores. The new model is designed to reward good credit habits and financial brands should be looking for ways to capitalize on that in their own customer engagement efforts.

Lily Harder

Lily Harder

Lily Harder is Vice President of Research at Comperemedia. She specializes in financial services, researching industry trends and competitive intelligence insights.