Big Changes Coming to How This Credit Score Is Calculated

Apr 24, 2017

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This fall, consumers will see an adjustment in the way one credit score is calculated — and this change will likely affect many who have high credit limits.

The credit bureaus Experian, TransUnion and Equifax will be rolling out changes to their scoring system called VantageScore. The new model will place a higher emphasis on trends in someone’s credit history, like timely payments or how much debt they hold. The credit bureaus hope the new score will give a better overall picture of someone’s credit behavior and risk level, according to Jeff Richardson, a spokesman for VantageScore Solutions.

The biggest change is the use of trends and trajectories. In the past, your score wouldn’t be affected as long as you were at least making the minimum payments on your cards. Now you’ll be rewarded for making larger payments and getting rid of your debt, but those who are accumulating more debt will be penalized (even if they are making the minimum payments).

The current system dings those who have high credit utilization ratios. Generally, you want to keep your utilization under 30%. For example, if you have a $10,000 credit limit, you would want to keep your spending under $3,000 a month.

Under the old model, if a consumer made a large purchase on their credit card, upping their utilization ratio, they could see their credit score take a temporary hit. But if that consumer had a history of having a low credit utilization ratio, VantageScore’s new system will factor their history in so their score won’t be affected as much.

And for all of those who have lots of cards open, your score could be hurt as well. VantageScore will punish those with exorbitantly high credit card limits because they have the ability to rack up high credit card debt quickly.

In the past it was recommended to keep all your credit card accounts open (if you could afford the annual fees), helping your average age of accounts score and keeping your credit utilization ratio lower. Now it may be worth considering closing some accounts that you may not use.

This is good news for TPG, who decided to do some spring cleaning and cancel 11 of his cards last week.

It’s important to note the difference between FICO vs VantageScore, as they use different methods of calculating one’s credit score. These changes are specifically affecting the VantageScore system, and not FICO’s.

It’s unclear which banks use VantageScore and which use FICO calculations when applying for a credit card, but according to Nerdwallet, VantageScore is becoming more widely used:

“In the 12 months ending June 30, 2016, VantageScores were used by 2,400 lenders and other industry participants and 20 of the 25 largest financial institutions. About 8 billion scores were pulled in that time, about a 40% increase from the year before.”

Your length of credit history makes up 15% of your FICO score.
Factors that are considered in making of a FICO score.

The new system hopes to do better job of forecasting consumer defaults than FICO’s old system, which didn’t do a great job of forecasting consumer defaults during the last financial crisis.

This news is in addition to last month’s announcement that civil judgements, medical debts and tax liens will not be included in individuals’ credit reports. That could raise the scores of those affected by 20 points.

Ultimately, the most important factors in having a healthy credit score are paying your bills on time and in full, paying off any credit card debt and showing that you’re making progress over time in those two areas.

H/T: USA Today/Associated Press

Featured image courtesy of Cnythzl via Getty Images.

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