What Credit Unions & Members Need to Know About Upcoming FICO Changes

FICO adjusts its credit score modeling every few years to adapt to consumer behavior. This summer it will be rolling out FICO 10 and 10 T, which take new trends into account and are expected to hit those struggling financially the hardest.

Borrowers have used personal loans to consolidate debts and fintechs have raged into the market with new offerings, which bumped personal loans up 12% year over year, according to Experian. This is a first for FICO to distinguish personal loans as a separate category, and NPR reported that consumers have taken on a record $300 billion in personal loans. As a result, the new FICO 10 and 10 T place heavier emphasis on personal loans, negatively affecting the consumers who need the most assistance in getting their debts under control.

FICO estimated 110 million consumers will see shifts of less than 20 points either way based on the new modeling, a CNN article stated. However, 80 million people are expected to experience larger adjustments, about half of them – 40 million American consumers – downward.

The T in FICO 10 T stands for Trends, which means credit unions will have a longer view of borrowers’ credit history – 24 months – Fortune wrote. Those who pay off their credit cards every month will likely see a bit of an uptick as one-time, large expenses, such as a family vacation, will have less of an impact on their score than those who are struggling with minimum monthly payments. Other effects, as reported by The New York Times, include increased penalties for recent late payments and high usage of overall available credit for longer periods.

While FICOs changes were necessary for a more accurate view of a borrowers’ willingness and ability to repay, the very consumers credit unions are trying to help – those who may have dings in their credit history or earn modest incomes – will need extra help when lenders begin adapting the new scoring models, expected by the end of 2020.

Here’s the bottom line: Borrowers with strong credit will be even greater, while those who are struggling with their finances will be pushed down either further. Kathryn Davis, CEO of Valley First Credit Union and former CEO of BALANCE, shared with me one time that stronger credit scores tend to begin around $50,000 in income. So how can credit unions help those of modest means? Financial and credit education, as well as financial assistance, are critical, because those who could save money from a responsible refinancing into a personal loan may actually hurt their credit scores, negatively affecting pricing on future borrowing. More consumers may be pushed to predatory lenders who strategically place their locations in low-income areas and are willing to take the risk at a hefty price to the borrower.

While FICO’s credit score modeling is changing, the basics of sound credit management have not. Credit unions should take the opportunity to educate consumers about the impact of late payments on their credit score, living within their means and not applying for too much credit too often. And consumers can check their credit reports – not scores – annually for free at the federal government-backed AnnualCreditReport.com to ensure the reports are accurate and free from fraud. Work with members to create a plan to help clean up their credit histories and stress the importance of their score on loan pricing and what that means to them in real dollars.

The latest FICO update presents credit unions with openings to build and deepen member relationships. Taking the opportunity to provide useful information members can act on helps them and earns their trust at the same time, which generates loyalty in the form of increased services per member and priceless referral marketing. In addition, economists have been expecting a boost in homebuying as the vast millennial generation is planting roots, and Fannie and Freddie use older FICO models, so credit unions may see opportunities with these members in mortgage originations. Home equities and refinancings may become more appealing as personal loans are less favorable to consumer credit scores, and your credit union educates them about that. It’s a simple opportunity to assist members and build business – take it.

Shana Richardson is CEO of Ser Tech, a Dallas, Texas-based financial technology services company serving credit unions.