New FICO Credit Scores Will Affect Millions of Americans
Even if you’re paying on time, if you previously always paid off your credit cards but now carry a balance from month to month, that will lower your credit score more than it would have previously. And one more thing: If you took out a personal loan to pay off or pay down credit card debt but then ran up the balances on your credit cards again, your credit score will likely go down more than it would have before.
What should I do about all this?
For the most part, you should follow the same advice you’ve always heard about managing debt, especially credit card debt[6]. But there are a few extra caveats. First, if you previously had a lot of debt and/or were late making payments but you’ve recently cleaned up your act — be patient. It may take a little longer for your new good behavior to be reflected in your credit score.
Next, it’s even more important than it was before to make credit card and other loan payments on time. If you haven’t already done so, set up automatic payments so that at least the minimum payment will be covered. You need to pay more than the minimum payment to pay down or pay off your credit card debt, but at least having the minimum payment automatically deducted for you will prevent you from getting dinged with late payment fees, and it will keep late payments from lowering your credit score.
You may be considering taking out a personal loan to consolidate some or all of your credit card debt. That can be a great idea because you’ll wind up with a lower interest rate, which means you can get out of debt faster. However, if you do choose this option, make sure you don’t start running up your credit card balances again. Otherwise, not only will your credit score suffer badly, you’ll be even deeper in debt than you were before.
The new FICO score pays close attention to how your debt is trending over time and so should you. If your total debt is shrinking and has been for the past several months, then it will look to FICO like you’re on the right track and your credit score should reflect that. Not only that, you actually will be on the right track. And you can look forward to a day when you’ll be debt free.