Every so often FICO changes its credit scoring model. Sometimes it helps consumers and other times it hurts them.

The latest changes focus on a consumer’s debt level and that may not be good. Since a credit score’s job is to help lenders assess risk, the change makes sense. It gives future lenders a better idea of your debt level. If you’re constantly taking on more debt, your credit score will fall.

How Personal Loans Affect your Credit Score

Before, personal loans were just another installment loan on your credit report. They worked into your payment history like any other loan. They also affect your credit mix – which was a good thing if you had installment and revolving debt, not just one or the other.

Now, the credit scoring model looks at personal loans more closely. They determine if you took out the personal loan to consolidate your existing consumer debt. If you then rack up more credit card debt, it negatively affects your credit score.

If you take out a personal loan to consolidate debt, you should lock up your credit cards, not rack up more debt.

If you rack up more debt, you’re a higher risk and your credit score will show it.

Payment History Still Matters Too

Consumers with already low credit scores who pay their bills late will also see a larger drop in their credit scores. The new credit model creates quite a difference between good and bad credit.

Poor credit habits will be easy to spot in a credit score now. Before, they were obvious, but you had to look at the credit history rather than the score. If you brought your payments current, your score would increase quickly.

This wasn’t a fair representation of your credit history, though. The new credit scoring model fixes this, giving lenders a better idea of your level of financial responsibility.

What you can Do

Fortunately, you control how the new credit scoring model affects you.

• Pay your bills on time – It’s always been important to pay your bills on time, but your credit score relies on it even more now. Don’t take on debts you can’t pay.

• Keep your debt utilization rate low – Don’t overcharge your credit cards. Keep your balances at 30 percent or less of the credit line.

• Watch your personal loans – If you use a personal loan to consolidate debt, don’t use your credit cards. Lock them up and don’t use them until you pay off your personal loan.

These steps will lessen the effect you feel from the new credit scoring model. While it’s true the new model helps consumers with great credit and hurts those with bad credit, it all comes down to your credit habits. You’re in control of what your credit score says about you. Adopt good credit habits today and watch your credit score rise.

Rahul Iyer