Big changes to the way your credit score is calculated are good news for some people -- and not so great news for others.
It gets complicated, but here’s the skinny: VantageScore, a credit scoring system that is used by the three major credit bureaus -- Experian, Equifax and TransUnion -- has made changes to its model that went into effect this summer.
The goal is to give creditors a better picture of a person’s financial health and just how risky it is to loan them money -- through credit cards or an auto loan, for instance.
Paying off debt is rewarded
The new model relies more on “trended credit data” that “details the trajectory of borrower behaviors,” according to VantageScore.
What does that mean? Basically, it will now reward people who pay off their debt instead of simply making the minimum payments and allowing that debt to get bigger and bigger.
Some debt is no longer considered
Civil judgments, medical debt and tax liens no longer are considered when calculating credit scores thanks to a 2015 settlement with 31 states’ attorneys general and the three major credit reporting agencies. This came because regulators were becoming skeptical about how well credit monitoring companies were doing their job.
According to the Consumer Financial Protection Bureau, consumers regularly complain about the credit reporting industry. The federal agency fielded about 185,700 credit reporting complaints in February 2017 alone.
“Consumers have said that when they dispute an item on their report, nothing changes even though federal law requires the consumer reporting company to conduct a reasonable reinvestigation and update the file to reflect any necessary changes or delete the item,” the March 2017 report said. “Consumers also frequently complain of debts already paid showing up on their report as unpaid.”
Opening lots of credit cards is discouraged
In past years, there wasn’t much downside to opening multiple credit cards -- as long as you could pay them off and afford any fees. Now, with the new model, that could hurt your credit score. As the new scoring system sees it, the more available credit you have, the more trouble you could get into by racking up debt that you might not be able to afford to pay off.
One note in all of this: While changes to VantageScore could impact your ability to get a car loan, a new credit card or an apartment, it probably wouldn’t help you -- or hurt you -- if you’re trying to buy a house. Mortgage lenders typically consider your separate FICO score for that.
Still, regardless of all of these changes, the lesson to consumers, who are striving for top-notch credit scores and superior financial health, is the same: Never charge more on your credit cards than you can afford and always pay off your debt.
Wondering what’s up with your credit score? You can get a free copy of your credit report every 12 months from Equifax, Experian and TransUnion at AnnualCreditReport.com.
The CESI Team is committed to helping you reach your financial goals. If debt keeps you from living the life you dream of, contact us for a free debt analysis today and get started on the road to a brighter future!
Consumer Education Services, Inc. empowers people to overcome their financial challenges and lead financially-healthy lives.
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