MARY LOUISE KELLY, HOST:
Your credit score - it can determine whether you can buy a car, get certain jobs, rent an apartment. It is, in other words, a big deal. And many Americans' credit scores are about to change, even if they don't do anything. NPR's Chris Arnold reports.
CHRIS ARNOLD, BYLINE: The company that's at the heart of the credit scoring system is called FICO. And every five years or so, it updates the way that it determines your score. Joanne Gaskin is the vice president at FICO. She says 40 million Americans are likely to see their FICO scores drop by 20 points or more. An equal number should go up by the same amount.
JOANNE GASKIN: The biggest change is the change in treatment for personal loans.
ARNOLD: Personal loans - a lot more Americans are getting these. And together, they owe more than $300 billion on these loans. There are all kinds of offers in the mail and online, TV ads.
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UNIDENTIFIED PERSON: With a personal loan from SOFI, you can consolidate your credit card debt into one monthly payment and get your future right.
ARNOLD: That sounds pretty good - getting your future right and paying off all your credit cards with a lower interest rate loan. You're going to get it together and not be swamped by credit card debt. But the problem is a lot of people take out these types of loans but don't change their spending habits, so they just start piling up credit card balances again and slide deeper into debt.
GASKIN: And so what we find is the potential that consumers' credit file carries more risk than what was apparent.
ARNOLD: So Gaskin says for the first time, FICO is breaking out personal loans as a distinct category and looking at people's spending over time to see if they're being responsible with them. The long and short of all this is, she says, is that if your finances are in good shape, you're likely to see your score improve. But...
GASKIN: Mostly, those who will see a score decline are already in the relatively lower FICO score ranges, so like 580 and below.
ARNOLD: That is not good news for people who are struggling financially, says Marisabel Torres with the Center for Responsible Lending.
MARISABEL TORRES: Well, it sounds like we're penalizing people for getting into a bad situation.
ARNOLD: Torres doesn't like that people who already have low scores are most likely to see their scores go even lower. She says that will make inequities in the credit system worse. She says with these personal loans, people with good credit can qualify for good terms. But she says predatory lenders charge people on lower incomes very high interest rates.
TORRES: A lot of the predatory products concentrate these offers in lower-income neighborhoods, targeting communities of color especially, who tend to have the more limited options for financing and for credit. They end up getting ensnared and really into this cyclical debt.
ARNOLD: And now, she says, it sounds like they'll get hit with an even lower credit score. It's worth noting that for some loans, especially mortgages, lenders use older versions of the FICO score. Gaskin from FICO says the goal with this newest FICO score is to give lenders better information so they can extend credit to more borrowers at better rates. Sara Rathner is with the personal finance site NerdWallet. She says given how important your credit score is to your financial life, it's good to know how to improve it.
SARA RATHNER: Don't make late payments on a regular basis. Pay all of your debt obligations on time every month. That's huge.
ARNOLD: Rathner says one thing that a lot of people don't realize is that you often don't want to close older credit card accounts.
RATHNER: So many people think about quote-unquote, "cleaning up their credit," as like Marie Kondo-ing (ph) their wallet, and they have to get rid of any excess because it's hurting them. But in the case of credit cards, it actually can help to hold onto older accounts for a long period of time.
ARNOLD: That's because it gives you a longer credit history. And Rathner says it's good to have plenty of available credit on a few cards. You just don't want to use too much of that credit.
Chris Arnold, NPR News.
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KELLY: And to learn more about how to boost your credit card IQ, you can check out NPR's Life Kit podcast.
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