Major changes coming to how your credit score is calculated
by: Ken Sweet
NEW YORK (AP) — The math behind your credit score is getting an overhaul, with changes big enough that they might alter the behavior of both cautious spenders as well as riskier borrowers.
Most notably for those with high scores: Abiding by the golden rule of “don’t close your credit card accounts” may now hurt your standing. On the other side, those with low scores may benefit from the removal of civil judgments, medical debts and tax liens as factors.
Using what’s known as trended data is the biggest change. The phrase means credit scores will take into account the trajectory of a borrower’s debts on a month-to-month basis. So a person who is paying down debt is now likely to be scored better than a person who is making minimum monthly payments but has been slowly accumulating credit card debt.
“This is a really big deal,” said John Ulzheimer, an expert in credit reports and credit scoring. Ulzheimer said taking trended data into account has long been considered by the credit score industry, but hasn’t been implemented on a meaningful scale. He expects more lenders to adopt it.
People with high credit scores may be affected the most, since the goal of trended data is to see warning signs long before a borrower actually gets into serious trouble.
The change also shakes up the maxim that had people keeping open accounts they’d opened long ago. An important metric in calculating credit scores has been the portion of their available credit people are actually using. 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.
But VantageScore will now mark a borrower negatively for having excessively large credit card limits, on the theory that the person could run up a high credit card debt quickly. Those who have prime credit scores may be hurt the most, since they are most likely to have multiple cards open. But those who like to play the credit card rewards program points game could be affected as well.
Taking civil judgments, medical debts and tax liens out of the equation comes after a 2015 agreement between the three credit bureaus and 31 state attorneys general. The argument was that civil judgments and tax liens —which can significantly hurt a person’s credit score — were often full of errors. Medical debt was being reported on a person’s credit report before there was time for insurance to reimburse.
People with those items on their credit reports now could see a bump of as much as 20 points. But it won’t help much if they also have negative marks like delinquencies and debts that have gone to collection.
Mortgages, though, won’t be affected. The government-owned mortgage companies Fannie Mae and Freddie Mac require a FICO score for eligibility. Because of their outsized influence on the market, few mortgage lenders use VantageScore.