FICO Changes Could Lower Your Credit Score

Summary

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WSJ Your Money Briefing – Episode Summary

Episode: FICO Changes Could Lower Your Credit Score

Date: January 23, 2020
Host: J.R. Whalen
Guest: AnnaMaria Andriotis (WSJ Reporter)

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Overview

This episode spotlights major changes coming to the FICO credit score model. As personal debt hits record highs and lenders seek to refine their risk assessments, the discussion centers on how the new FICO version will impact borrowers—especially those with lower or riskier borrowing histories. The episode breaks down what’s changing, why, and how both high and low-scoring consumers may see their scores diverge more significantly.

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Key Discussion Points & Insights

1. Why Credit Scores Are Changing

• Current Environment: Economic recovery has been ongoing for a decade, but consumer debt is at an all-time high. Lenders are concerned about distinguishing between safe borrowers and higher-risk ones.

  “We are more than 10 years into an economic recovery. Consumer debt is at a record high and lenders are concerned about their ability to balance, giving more people loans and whether the people they're giving loans to are safe bets.”
  – AnnaMaria Andriotis (01:42)

• Balance Between Inclusivity and Risk: While recent years saw efforts to bring more people into the lending pool, the pendulum now swings toward tighter risk management.

  “While searching for people who might be more creditworthy than their scores suggest, lenders are also on the lookout for people that they are approving who maybe they shouldn't be approving because maybe their credit score looks higher than it actually deserves to be.”
  – AnnaMaria Andriotis (02:26)

2. Biggest Changes in the FICO Model

• Greater Divergence Between High and Low Scores:

  • Borrowers with scores 680 and above and consistently good habits will see bigger increases in their scores.
  • Borrowers with scores 600 and below and continued negative behaviors will see sharper declines than before.

  “There will be a bigger separation between people who have higher credit scores and lower credit scores…consumers who have a high credit score…will likely see their credit score rise…people who have low credit scores…who continue to exhibit bad behavior…their score will likely fall by more…”
  – AnnaMaria Andriotis (04:14)

• Personal Loans Now Flagged More Heavily:

  • The system will closely track individuals taking out personal loans to pay off credit card debt.
  • If those consumers then run up new credit card debt, their scores will take an extra hit.

  “This score is going to essentially flag certain consumers who sign up for personal loans in order to pay down their credit card debt, but are then found to have both a personal loan and to be once again racking up their credit card debt.”
  – AnnaMaria Andriotis (06:39, 08:10)

• Negative Behaviors Judged More Harshly:

  • Missed payments and rising balances on credit cards will count more against a borrower.
  • Particularly, carrying growing balances over several months will be penalized more than before.

  “If a consumer has been paying their credit card bills in full every month, but all of a sudden they start carrying growing balances...that will be judged more harshly than with previous score versions.”
  – AnnaMaria Andriotis (06:45)

3. Who Is and Isn’t Affected

• No Change for “No Credit”:

  • People with no borrowing history (e.g., pay everything in cash) are still assessed differently; the FICO change focuses on individuals already in the credit system.

  “No credit doesn’t mean bad credit.”
  – J.R. Whalen (05:59)

  “That is a different strategy, geared at a pool of people…who have low or no credit scores because of a lack of a borrowing history.”
  – AnnaMaria Andriotis (06:00)

4. Implementation and Timing

• Roll-Out Timing:
  • The new FICO model will begin rolling out mid-2020.

  “The score will roll out this year, likely around the middle of the year.”
  – AnnaMaria Andriotis (09:02)

5. Industry and Economic Context

• Sign of Caution From Lenders:
  • Reflects concern about how long the economic recovery will last and whether credit reports accurately reflect true risk as memory of the last recession fades.

  “This change with FICO is essentially tapping into [concerns about the broader economy]. Are the credit reports, are the credit scores really providing a full read of a person’s risk?”
  – AnnaMaria Andriotis (09:11, 09:57)

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Notable Quotes & Memorable Moments

• On the consumer divide:

  “The big picture here is a growing gap between people with high scores and those with low scores.”
  – AnnaMaria Andriotis (04:56)

• On negative information falling off reports:

  “For most negative information, it’s seven years.”
  – AnnaMaria Andriotis (09:57)

• On negative borrowing patterns:

  “The appetite for rising debt levels is really not there with this new scoring model.”
  – AnnaMaria Andriotis (06:49)

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Important Timestamps

• Why FICO is changing now: 01:42–02:46
• How personal loans affect your score: 03:22–04:09, 06:39–08:10
• Widening gap in scoring: 04:14–05:23
• No credit vs. bad credit: 05:32–06:00
• How negative behavior is penalized: 06:35–08:10
• Rollout timing: 09:00–09:08
• Lender confidence and economic context: 09:08–10:09

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Episode Summary

This episode delivers a concise yet impactful explanation of how the new FICO model will affect both high- and low-scoring consumers. The changes promise to reward good credit behaviors more generously while penalizing risky patterns—especially growing debt and persistent missed payments—more harshly than previous models. Listeners received practical insights about how these shifts may influence borrowing power in 2020 and beyond, set against a backdrop of economic uncertainty and shifting lender strategies.

Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.

[B]

Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Some significant changes are coming to the way credit scores are calculated and that could have an impact on who gets a loan in the future.

[C]

People who have low credit scores, generally 600 or below, who continue to exhibit bad behavior, who have newly missed payments or other new sort of black marks, their score will will likely fall by more than what it would have fallen by with the previous version.

[B]

That's Wall Street Journal reporter Anna Maria Andreotis. She'll explain why FICO scores are changing. That's next. Your FICO score is basically your credit rating. It's what lenders use to decide if people are good credit bets or more of a risk when, well, the system that sets the FICO score is getting a makeover. And Wall Street Journal reporter Anna Maria Andreotis is here with the details. So, Anna Maria, not too long ago we discussed how as a result of the way the credit scores are calculated, most people's FICO scores were actually going to be going up. What happened?

[C]

Credit scores have been going up and what we're now seeing from FICO is a significant shift in the way that consumers will be assessed. Broadly speaking, what is happening is that we are more than 10 years into an economic recovery. Consumer debt is at a record high and lenders are concerned about their ability to balance, giving more people loans and whether the people they're giving loans to are safe bets. It's a complex calculation.

[B]

Now, lenders wanted the credit reporting companies to broaden the pool and help them find more borrowers. Did the pendulum kind of swing too far in one direction?

[C]

What the lenders ask the credit score and credit reporting companies for regarding finding more borrowers is still something that remains in effect. But the search has become more complex, meaning that while searching for people who might be more creditworthy than their scores suggest, lenders are also on the lookout for people that they are approving who maybe they shouldn't be approving because maybe their credit score looks maybe their credit scores higher than it actually deserves to be. It is a tricky balance. What it signals, though, are concerns about rising debt levels because ultimately many of the Changes being made in this new FICO score reflect consumers growing indebtedness.

[B]

And it's personal loans, the popularity of personal loans, that's one thing that sort of triggered this.

[C]

Well, this is one change that is unprecedented with FICO score updates. So to take a step back, FICO does updates to its credit score model every few years. The last time it did this was in 2014. These are not special scores that lenders can use, let's say, as a supplement or on the side to other scores. This is the general typical FICO score that we talk about that lenders generally use to help determine who to lend to. So this score is going to essentially flag certain consumers who sign up for personal loans, specifically people who sign up for personal loans in order to pay down their credit card debt.

[B]

Now, for a long time, the perfect credit score was 850. Will that change?

[C]

No, that will not change. The range will remain from as low as 300 to as high as 850. What will change is that there will be a growing, a bigger separation between people who have higher credit scores and lower credit scores. And this was shared with me by the company. So the positive side of things here is consumers who have a high credit score figure, anywhere around 680 or higher, who continue to exhibit good borrowing behavior will likely see their credit score rise by more than what it would have with previous FICO versions. But people who have low credit scores, generally 600 or below, who continue to exhibit bad behavior, who have newly missed payments or other new sort of black marks, their score will fall, will likely fall by more than what it would have fallen by with the previous version. So essentially, the big picture here is a growing gap between people with high scores and those with low scores.

[B]

But does this work against the effort that we talked about maybe a year or two ago to bring more potential borrowers into the ecosystem?

[C]

No, because the argument surrounding bringing more people into the current lending environment is are there people who can be proven to be financially responsible, but who are left out of the credit scoring system because they pay for everything with cash, for example, so they don't have a history of borrowing, that is a separate type of consumer borrower, be evaluated in a different way?

[B]

So no credit doesn't mean bad credit.

[C]

Exactly. That has been a different strategy, geared at a pool of people, a large pool of people who have low or no credit scores because of a lack of a borrowing history. This is a score, again, just replacing sort of the generic FICO scores that lenders use and have been using for a Long time. And what it seeks to do is to identify whether people who have credit scores, whether there is any extra risk associated with those people that it wasn't previously spotting.

[B]

So it puts them in a more defined category so lenders can track it.

[C]

Correct? Exactly. And it's less forgiving if there's negative behavior that is exhibited, and that negative behavior generally includes missed payments, will be judged more harshly. Rising debt levels will also be judged more harshly, in particular when taking into account products like credit cards. So, for example, if a consumer has been paying their credit card bills in full every month, but all of a sudden they start carrying growing balances, you know, maybe they're making their minimum payments to their credit card lenders, but they're carrying growing balances over several months that will be judged more harshly than with previous score versions. So essentially, the appetite for rising debt levels is really not there with this new scoring model. This score is going to essentially flag certain consumers who sign up for personal loans, specifically people who sign up for personal loans in order to pay down their credit card debt, but are then found to have both a personal loan and to be once again racking up their credit card debt. So this is data that FICO can see for the following reasons. When a consumer signs up for a personal loan, that personal loan has for a very long time and will continue to show up on their credit report. What will then happen if the consumer uses that personal loan to pay off their credit card debt? Let's say a consumer had $10,000 of credit card balances. The person's credit report would show that those $10,000 in credit card balances have fallen to zero, and that person now has a $10,000 personal loan balance. Right. So far, so good. The new score isn't flagging risk there. Where the score will flag risk is, so now the person has that $10,000 personal loan, but the credit card debt starts to rise again. So there is this indication that you took a personal loan to theoretically help pay down your credit card debt, but now you have that outstanding debt and you're racking up new credit card debt.

[B]

When will the new scoring model take effect?

[C]

The score will roll out this year, likely around the middle of the year.

[B]

What does this seem to say about lenders confidence in the economy?

[C]

There has been an ongoing concern for at least the last three years of how much longer does this economic recovery have to run in? Just listening to credit card issuer earnings calls and speaking with executives in the consumer lending space, shareholders of those companies as well, there's sort of a guessing game of when will this economy turn, when will the cycle turn? And this change with FICO is essentially tapping into that concern. As we get further and further away from the last recession and black marks, negative credit behaviors for from the last recession increasingly fall off of people's credit reports because of the passage of time,

[B]

about seven years when it falls off

[C]

for most negative information, it's seven years. As we get further away from that, some of the lenders are asking, are the credit reports, are the credit scores really providing a full read of a person's risk?

[B]

All right. That's Wall Street Journal reporter Anna Maria Andreotes with us. Ana Maria, thanks for coming on the show.

[C]

Thank you.

[B]

And that's your money briefing. I'm J.R. whelan in New York for the Wall Street Journal.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.