Will the New Rules of Credit Scoring Help or Hurt You?

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One of the most widely used credit-scoring systems is making some big changes in how it calculates your credit score.

VantageScore Solutions was founded by the three major credit bureaus — Experian, TransUnion and Equifax — as a competitor to the Fair Isaac Corporation, the people behind the widely used FICO score. And it recently announced that its new credit scoring model, VantageScore 4.0, will soon take a more holistic approach in calculating your three-digit number.

“It’s unusual and uncommon that a new scoring system presents itself as meaningfully different than scoring systems from other credit score developers,” says credit expert John Ulzheimer, who previously worked with both FICO and Equifax. “This one fits that bill for a couple of reasons.”

Here’s what to expect when the new scoring system rolls out in the fall — and what it means for your credit score.

The use of historical data means you’ll want your balances trending down.

The first big differentiator is the new model’s use of what the industry calls “trended” data. The formula will look at your borrowing history as more of a continuum — a trajectory of your balances and your utilization over time — rather than a freeze frame. “If we both have $10,000 credit card balances, but you’ve been paying yours down over time and I’ve been ramping mine up, the latter is considered a greater risk, and the new model will take it into consideration,” says Jeff Richardson, a spokesperson for VantageScore Solutions.

In other words, if your trend line shows that you're paying down debt — or, even better, paying off your monthly balances in full — that will help drive your score up. But if you've been accumulating rising credit card debt over the years and/or opening new credit card accounts relatively frequently, that will hurt you.

“It’s such a departure from scoring systems [that just look] at the one snapshot in time,” says Ulzheimer. “It tells a story about whether someone just paid off a balance, because he’s out applying for something, or whether that someone pays off the balance in full every month the majority of the time.”

That means quick credit fixes before loan applications might not work anymore.

With this in mind, how far ahead do you need to clean up your credit before applying for a mortgage or loan? “I used to say 30 days,” says Ulzheimer. “I can’t really give that advice anymore.” With trended data going back years, paying off your balance to boost your score the month before applying won’t fool anyone. Neither will increasing your credit limits so that you’re using a smaller percentage of your available credit than before. “If you’re somebody who has debt and is going to apply for a car loan, mortgage, or credit card, and you’re able to pay a significant amount fairly soon before the application, it won’t help you as much as it would in the past,” says Matt Schulz, senior industry analyst for CreditCards.com. Under the new system, your score will reflect your history of debt, even if you’ve got less of it at the moment.

Paying more than the minimum will benefit your score. 

Another difference will be the model’s consideration of your payments — not just if they’re on time, but how much more you’re putting towards the minimums due. Paying more than the minimum will be a positive sign for lenders, making you look as if you’re less of a credit risk. Plus, if you’re just paying the minimum, chances are your debt is going to keep growing, which will reflect negatively on your credit score.

“This [change in scoring could] help push the credit card user over the fence from being a revolver to a transactor, and that’s going to save the consumer an enormous amount of debt,” says Ulzheimer.

The new score is angling to be more forgiving and open-minded.

Finally, the new score will rely less on derogatory collections and public-records data like liens and judgements, and it will ignore medical collections that are less than six months old.

Moreover, it will use machine-learning to help score some 30-35 million consumers with thin credit files. That’s good news for millennials and other young folks.

FICO will remain the same — for now.

Your FICO score won’t be incorporating trended data into its scoring formula, and the company behind FICO downplayed the value of VantageScore’s changes. “The benefit they’re speaking about is less about consumers, and more around whether it adds predictive value for lenders,” says Sally Taylor-Shoff, FICO Scores Vice President. “They [the consumers] want to know the scores lenders are looking at. Lenders use FICO over 90 percent of the time.”

Ulzheimer begs to differ, calling the adoption rate of the VantageScore — over eight billion VantageScore credit scores were used between July 2015-June 2016, by over 2,400 lenders and other industry participants — “pretty impressive.” Still, he point out that even if FICO Scores and VantageScore are diverging in their respective approaches, they’ll likely tell similar stories. If you have good credit habits, you’ll have good scores all around. 

With Kelly Hultgren