VantageScore CHANGES – How Will They Affect Your Credit Score?
Q: I’ve heard that the VantageScore system is getting an overhaul. What kind of VantageScore changes are coming, and how will this affect my calculated score?
A: The VantageScore, which dictates how credit bureaus — Experian, TransUnion, and Equifax — determine your credit score, is going through a shake-up this fall. The company looks deeper into specific circumstances and what they say about your financial responsibility. VantageScore changes are coming.
A favorable credit score comes into play when you need to qualify for financing on a new car if you’re opening a new credit card or taking out a loan. Your credit score is the most important deciding factor for your approval in these scenarios and will influence your terms and interest rates.
It’s important to note that the new system will not impact mortgage loans. This is because few mortgage lenders use VantageScore; most use FICO scores to verify eligibility.
The changes will affect many people’s credit scores, though, for better or worse. It’s wise to learn all you can about these changes to make the necessary adjustments to your credit behavior.
Lucky for you, we’ve made it easy! We’ve broken the changes down into the three main areas they impact, and then we’ve simplified it by telling you what these VantageScore changes mean for you.
Trended Data & Trajectories
What it means:
VantageScore won’t check if you meet your minimum monthly payments; it will also consider trended data. This change means the company will analyze the trajectory of your debts on a month-to-month basis. They want to know the direction in which your finances are going. Are you gradually paying down debt or scraping by with the minimum payments as your balance slowly grows?
What it means for you:
Before the change, growing debt didn’t affect your score if you made minimum card payments. Now, if you’re careful about making the monthly payment, but your balance is increasing each month, your credit score will take a hit.
Conversely, your score will likely get a boost if you’re working toward actually paying down your debt. If you don’t fall into this category, it’s time to get serious about doing away with your debt for good. Even small steps toward this goal will be recognized and rewarded.
Large Credit Lines
What it means:
Having lots of available credit was once considered a mark of good credit. After all, if the companies deemed you responsible enough to merit all that credit, it has to be a good thing, right? Well, not anymore.
With the new system in place, VantageScore will negatively mark a borrower for substantial credit card limits. The theory behind this rationale is simple: lots of available credit means the borrower can quickly rack up a huge bill.
What it means for you:
If you enjoy an excellent credit score, you likely have an extensive line of credit available and will be negatively impacted by this change unless you take action. This change also upends the old advice that the more credit cards you have open, the better. The rationalization behind that maxim was to build your available credit and, thus, improve your score. With the modified system, though, the opposite is true.
Let’s say Bob has $4,000 in credit card debt with a $40,000 limit across several cards. He’s only using 10% of his available credit. In the past, this would net him a higher credit score. On the other hand, Bill has $1,500 in debt out of an $8,000 limit. In the past, this modest credit limit would lower his score.
With the new changes in place, the realities are shifting. Bob, who has much more available credit, will likely score lower than Bill, who only has $6,500 available to borrow.
Aside from those who enjoy excellent credit scores and have several open cards, this change will also affect people who enjoy playing the credit card rewards-and-points game.
Whichever category you fall into, using less than 30% of your available credit is best. If you have an extensive credit line open across several cards, consider closing some of your cards to lower that number. Finally, if you’re considering opening a new card soon, ask for a smaller credit limit over a larger one.
Medical Debt, Tax Liens & Civil Judgements
What it means:
Medical debt, tax liens, and civil judgments will no longer determine your credit score. These elements are removed because they often harm a credit score prematurely and are later proven erroneous. Civil judgments and tax liens are often inaccurate and can significantly lower one’s score before correcting the error. Similarly, medical debt can hurt credit scores before insurance can reimburse the borrower for the payments.
What it means for you:
If you’ve had any of the above dragging down your credit score, you have cause to celebrate. You might even see a jump of as many as 20 points to your score! On the flip side, if you have negative marks from things like delinquencies and debts that have gone to collection agencies, this new rule won’t help you much.
Now you know what the VantageScore is and what changes are coming. Do you think the new system encourages the responsible use of credit? Why or why not? Please share your thoughts with us in the comments! And if you like this post, check out our other posts on our MoneySmart Tips blog.
