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Since the major credit bureaus recently announced an updated credit scoring system, everyone, from the credit conscious to the careless, could be affected by the new regulatory approach. Starting on July 1, all three credit bureaus (TransUnion, Equifax and Experian) will begin using "trended" data culled from credit reports, plus other new factors, like relying less on negative data, to influence how your score is calculated.The move could pose big changes to American consumers, but how it affects you may depend on your own credit profile and score.
The July reveal date is actually part of the debut of VantageScore 4.0, the fourth iteration of the credit scoring model that’s been in effect for the last 11 years.Vantage is similar to the more well-known FICO score, using information from your credit report to craft your score with a similar scoring range, from 300 to 850.Both models have a significant difference in the way they build out their credit scores. FICO receives reports of your credit activity from lenders and businesses, and from that information, builds out a separate scoring model for each credit bureau based on the data they have -- which is why when you look up your FICO score, you’ll have three scores that often differ slightly. Vantage, on the other hand, was created by TransUnion, Equifax and Experian, and bases its scoring model on data collected by all three agencies together.Up until now, your credit score is calculated by relying on static data: recent information from your credit report, like seeing if you paid your bills on time, how much credit you’ve utilized, or if you’ve been delinquent with any accounts. The scoring model looks at a snapshot of your credit behavior now versus then.In the new scoring criteria, trended data bases your credit score on certain points in time in your overall credit history. Essentially, by tracking how your history is trending, reporting agencies can detect patterns of credit behaviors that say more about you and your creditworthiness than your credit usage from the last month or two alone could accurately reflect.Taking a broader look at these "trends" in your credit behavior, according to experts, can help creditors and lenders differentiate between those prone to going into debt, and those who use their credit more wisely.
Under the new and improved scoring models, credit agencies will also stop focusing closely on negative data.With the change, they’ll begin omitting specific types of data from credit reports, such as tax liens and civil judgments, if they don’t include personal information, like your name, your Social Security number, address, or date of birth. Most of this information usually isn’t included, making their removal from credit scoring significant.They’ll also place less emphasis on other derogatory public record data, especially medical debt collections listed on credit reports less than than six months old. Part of this change stems from the fact that a large amount of medical debt is paid late by insurers -- sometimes the result of slow or faulty administrative processes -- but it’s the consumer who unfairly shoulders the blame on their credit report.If medical debt is newer than six months old, according to reports, it’ll be ignored to give time for payment processing. If it’s older than six months, it’ll still factor into your overall score less than non-medical debts.The big incentive for the credit agencies to enact these changes was a legal settlement with lawmakers in more than 30 states. Legislators alleged that negative credit report data is often erroneously linked to the wrong people, harming their chances at receiving loans, credit, or low interest rates when their actual credit might otherwise qualify them. The Consumer Financial Protection Bureau also noted that an abundance of credit reporting complaints (over 882,000 this time last year), is one of the driving reasons behind the change.
The July scoring change will only be available to lenders and commercial entities, but it should take effect on the consumer level by next year, according to reports. At that time, many Americans may even see a boost in their credit scores with the promised removal of negative information.While the trended data may improve your chances of getting approved for that credit card or loan, since it’ll look at consistently good credit rather than recent bad credit, it may not do much to boost your credit score in the short term. To do that, you’ll still need to maintain your credit and look for ways to improve it, no matter what the scoring climate is.
Remember to practice these day-to-day tips:
Prioritize paying your bills. Payment of your credit accounts, like your credit card, mortgage or auto loan, or your student loans, make up more than one third of your credit score. Pay them on time and for the complete amount by the due date, and you’re on the fast track to healthy credit.
Check your credit report. New scoring changes may remove some negative information from credit reports around the country, but some may remain on yours, and worse yet, it could be false data that could be harming your credit. Obtain a copy of your credit report, look for any inconsistent info, and take the steps to dispute errors with the credit agencies. A detailed personal sweep of your credit can clarify and correct mistakes that can also boost your score.
Keep a balanced credit profile. The amount of credit you use compared to the credit available to you is your credit utilization ratio. Keep this number at 30 percent and it tells creditors that you don’t shy away from credit, but you don’t use too much. You’re credit balanced.
Avoid applying for too much credit. When you go to apply for a new credit card or a loan, there’s a tendency to want to apply to a bunch at the same time, thinking that by playing the numbers game, you’ll get a few approvals to choose from. But applying for too much credit can also send the unintended message that you’re desperate for credit; plus, it can trigger too many hard checks of your credit that can ding your score. Temper yourself, apply for small amounts at once, and wait a month or two before applying for more accounts. Your credit, combined with some of the upcoming scoring changes, will thank you for it.
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