What You Must Know About the Big Changes Coming to Credit Scores
American credit scores are at an all-time high. In April 2017, the average consumer’s FICO was 700 out of 850, Fox Business reported. Meanwhile, the share of people in the U.S. with subprime scores (those below 600) has fallen to 20%, down from 25.5% in 2010. Plus, mortgage defaults and other black marks from the Great Recession are finally starting to fall off many people’s credit histories. The rosier credit reports and higher scores could spur banks to lend more freely and at lower interest rates.
The possibility of cheaper loans isn’t the only good credit news for consumers. Some people might soon see their credit scores rise because of tweaks to the way one credit score, the VantageScore, is calculated. But some borrowers, especially those with lots of cards, might not like the changes. Whether you’re a points chaser with a wallet full of plastic or someone who has struggled with credit in the past, here are 11 things you need to know about the coming changes to credit scores.
1. The changes apply to VantageScores, not FICO scores
We tend to think of a credit score as a single, three-digit number. But in reality, you have multiple credit scores. The FICO score is the most widely known, and it comes in dozens of iterations. Each major credit bureau (Experian, Equifax, and TransUnion) has its own FICO scores. And there are different scores for different types of loans, say, an auto loan versus a mortgage loan.
Then, there’s the VantageScore. This score is a competitor to FICO, developed by the major credit bureaus, who claim it scores more people and does a better job of predicting credit risk than FICO scores. From 2015 to 2016, 2,400 lenders used VantageScores. If you get a free score from your credit card issuer, you’re likely seeing your VantageScore.
“While mortgage lenders still rely on FICO, 20 of the top 25 financial institutions use some version of the VantageScore in their underwriting decisions,” said Helene Raynaud, the president of Guidewell Financial Solutions. “That’s why these credit scoring changes are likely to affect many of us.”
Next: The new trend in credit scoring
2. The shift is toward trending data
So what’s changing about your VantageScore? One of the big shifts is a move toward trended data. Rather than looking at your credit situation at a single point in time, VantageScore 4.0 will look at your behavior over time. If you’ve run up big balances on your credit cards but have been diligently paying off what you owe, you should have a better score than someone who keeps swiping their cards and accumulating more debt, a VantageScore spokesperson explained to The Washington Post.
The new model also means people who charge a big purchase they plan to quickly pay off won’t take a credit hit. Rather than penalizing them for temporarily using a big share of their credit, the model will be able to see they borrowed and then promptly repaid the debt.
Next: Not carrying a balance is going to be even more important.
3. Paying only the minimum on your cards could hurt you more
According to Guidewell Financial Solutions, the shift toward trending data won’t make a big difference to people who pay off their debts in full each month. But if you’re in the habit of only paying the minimum on your cards and are still accumulating debt, your score might suffer, even if your credit limits are high.
Previously, a person who always carried a balance and paid the minimum on time would not have seen their credit score suffer much, if at all, as long as their balance stayed below 30% of their available credit. Now, “it will become increasingly difficult for people in chronic credit card debt to mask the fact with low utilization,” Nick Clements of MagnifyMoney wrote for Forbes.
Next: A potential problem for people with lots of cards
4. Some borrowers with a lot of accounts could also take a hit
Consumers with tons of credit cards could also suffer under the new model. “It may also negatively affect consumers who have multiple credit card accounts open — even if these accounts are up to date and only kept to accrue reward points. Why? Because open accounts represent a ready opportunity to get further in debt,” according to Guidewell.
So should you cancel some of your cards to preserve your credit score? Not necessarily. Closing accounts, especially ones that have been open a long time, could hurt your FICO score, which more lenders use than the VantageScore, Investopedia explained. But the travel experts at One Mile at a Time speculated people who like to open lots of new cards to get mileage bonuses might want to start asking for smaller rather than larger credit limits.
Next: Fast credit fixes might get harder.
5. Quick credit fixes might not work
Repairing a damaged credit score has never been an overnight task. But there are things you can do to boost your score fairly quickly, such as improving your debt-to-credit ratio. Now, with the new VantageScore, relatively fast fixes to credit scores, such as requesting a credit line increase to improve your utilization ratio, might no longer work. That’s because the new trending model will still look back and see your bad credit history.
Worse, such a move could look like you’re scrambling for more credit and are a high-risk borrower. However, if it’s clear you’re making a concerted effort to be more responsible with credit and debt, your score will eventually improve.
“Today, if you use a personal loan to pay off your credit card debt, the drop in utilization will provide an almost instant boost to your score. With trended data, the boost probably won’t happen right away. Only if you keep the utilization low over time will you feel the reward,” Clements explained.
Next: Good news for people with a short credit history
6. People with little credit history could find it easier to borrow
Providing credit scores to people with minimal credit history has long been a problem, and it’s one that the VantageScore intends to solve. Version 4.0 takes another step in that direction by incorporating machine-learning techniques to better score consumers without much credit history and give them access to loans.
By assigning scores to another 30 million to 35 million potential borrowers, the new model will address the credit industry’s “greater need for an expanded universe of applicants,” said Sarah Davies, senior vice president for research, analytics, and product development at VantageScore Solutions.
Next: Unpaid medical bills won’t necessarily tank your score.
7. Some medical debt won’t affect your score
As of 2014, more than half of all debt on consumer credit reports was medical debt, according to the Consumer Financial Protection Bureau. Older credit scoring models stiffly penalized people for this debt, which was sometimes the result of insurance billing errors or hospitals quickly passing unpaid bills on to debt collectors.
The new VantageScore (as well as newer FICO score models) takes a more forgiving view of medical debt. VantageScore 4.0 will ignore any medical debt that’s less than six months old. Other medical debt will hurt your score much less than it did in the past, as credit reporting agencies have begun to realize an unpaid bill from an unexpected trip to the emergency room isn’t the same as thousands of dollars in credit card debt.
Next: Some negative items won’t count against you at all.
8. Certain tax liens and other public information won’t be included
The new VantageScore also incorporates another recent decision by the three major credit reporting agencies to ignore certain negative items when developing scores. Tax liens and civil judgments will no longer affect your credit score if the credit reporting agency doesn’t receive complete information, including a name, address, Social Security number, and date of birth.
Records will also need to be regularly checked to make sure they’re up to date. The shift could result in a FICO score boost of 20 to 40 points for nearly 12 million people, according to Consumerist. And it will also be reflected in the new VantageScore.
Next: What the changes mean for people applying for a mortgage
9. VantageScores aren’t used for mortgage applications — yet
Although financial experts urge you to keep tabs on your credit score at all times, many people are most worried about their score at one moment in time: just before they apply for a mortgage. But because most mortgage lenders still use FICO scores, not VantageScores, the changes to the latter probably won’t affect your ability to buy a house.
Nonetheless, VantageScore Solutions touts its new model as “well-suited to the U.S. mortgage market.” And it criticizes the FICO model as “outdated.” If lenders agree, VantageScores could eventually become far more important to many people.
Next: Change won’t happen overnight.
10. Lenders won’t adopt the new model right away
VantageScore 4.0 will be rolled out in 2017. But don’t expect lenders to start using it right away. Banks want to make sure the new scores are accurate before they start using them in lending decisions, Clements explained. You might first see the change in the free credit score you get from sites, such as Credit Karma. Eventually, some lenders will start using the new model, too.
Next: Should you change the way you manage your credit?
11. The basics of maintaining good credit haven’t changed
Confused or worried about all these changes? Don’t stress too much. The basics of maintaining a good credit score haven’t changed all that much. You should avoid using too much of your available credit, refrain from opening tons of accounts all at once, and pay off what you owe in a timely manner. People who do carry balances on their cards should think about paying those off because that could hurt their VantageScore. But that’s a smart move no matter what credit scoring model is used.