New credit score calculation – What you need to know
If you’ve heard anything in the news lately about changes to the way your credit score may be calculated, you haven’t heard wrong. This update will now benefit the conservative spenders, but may also affect those who are riskier consumers. Meaning, those with low scores may benefit from the removal of certain items with this new calculation, such as civil judgments, medical debts and tax liens, which are current factors brought into your credit history.
This new method is being implemented later this year by VantageScore, a company created by the three major credit bureaus –Experian, Equifax, and Transunion. This is different from the more commonly known “Fair Isaac Corporation” aka FICO score, which has been traditionally used by all financial institutions.
What are the upcoming changes?
This method will now be utilizing “trended data” which means credit scores will now take into account the trajectory of a borrower’s debts on a month-to-month basis. Whereas, if you are actively and responsibly paying down your debt, you are now likely to be scored higher than a person who is just making minimum payments and slowly accumulating more debt.
Another big change affects the utilization factor in your credit score. Remember how 30% of your credit score factors in how much you owe on each account, and how much credit you have utilized? VantageScore will now mark a borrower negatively for having excessively large credit limits. The reasoning behind this infers the consumer’s opportunity to run up high credit card debt quickly. If you have an excellent credit score, you may be hurt the most, since you are most likely to have several cards open at a time with larger credit limits.
For example: A person with $5,000 in credit card debt with a $50,000 limit across several cards could score better than someone with $2,000 in debt on a $10,000 limit because of that ratio.
With taking civil judgments (1. is the situation when there is a ruling against you in a court of law pertaining to non-criminal matters, and often includes requiring payment of damages) medical debts, and tax liens out of the equation, people may see a bump in their credit scores by as much as 20 points. However, negative marks such as delinquencies and debts sent to a collection agency will not be removed. In addition, very few mortgage companies are using VantageScore and will still require a FICO score for eligibility.
Some lenders are pulling credit scores for other reasons, for example, when people are applying for an apartment, opening a credit card or applying for an auto loan, the lender may choose to use VantageScore. About 8 billion VantageScore credit scores were used between July 2015 and June 2016, up 40 percent from the year before. This new scoring model also should not affect what consumers are doing to boost their credit score.
While this may seem like a huge change, this new model shouldn’t be met with panic when it goes into effect later this Fall, regardless of your credit situation. As always, you should know where your score stands. You can get your FICO score for free today through Credit Karma! Get started and get access to your VantageScore as well.
Source : https://www.usatoday.com/story/money/personalfinance/2017/04/22/major-changes-coming-how-your-credit-score-calculated/100653342/