Changes are coming to your FICO score calculation

Fair Isaac, the company behind your FICO score, is changing the way it calculates a person's credit. Although that could boost millions of consumers' credit scores, it could spell trouble for people grappling with debt. 

FICO 10, as the new credit-scoring model is called, will lift some 40 million Americans' credit scores by as much as 20 points, though most consumers will see only a modest impact or no change, according to the company. Another 40 million are likely to see their scores drop. The changes are set to take effect sometime this summer.

Lenders use a person's FICO score, or other credit metrics such as VantageScore, to assess if a borrower is creditworthy. In another notable change, the new calculation will factor in personal loans, FICO said, including from the time they are issued and consumers begin repayment to when a loan goes into collection. 

FICO 10 will also look at consumers' payments and accounts over a longer period of time — an effort to "smooth out the peaks and valleys" in a person's financial history, said credit industry analyst Ted Rossman of CreditCards.com.

For lenders, examining a person's financial moves over several months offers a better picture of their credit history, said Matt Schulz, an industry analyst with CompareCards.com.

"It's like when your kid wants to borrow the car keys," he said. "If the kid has handled them responsibly for months without incident, you'll feel good about handing them over. If your kid has mostly done well but also has a speeding ticket and a few missed curfews in the past year, you might not be as trusting."

Rossman said assessing people's credit over an extended period of time benefits both lenders and borrowers.

"A temporary spending spike such as a vacation or holiday shopping won't hurt your credit score as much if you generally keep your credit utilization low," he said. "Rather than getting too hung up on which model a particular lender is using, consumers should practice fundamental good habits such as paying their bills on time and keeping their debts low."

Credit cards carry an average interest rate of about 17% for all account holders, and about 24% for those with poor credit, according to CreditCards.com. Credit cards can be paid off at any time to avoid additional interest, but installment debt like personal loans have set monthly payments and no bonus for being paid off early. 

On top of that, installment loans tend not to offer reward points or provide the same degree of protection against fraudulent sales that credit cards do.