Using historical data means you want your balance to decline
The first big difference is the use of the new model of known data called “vector data.” The model looks at your borrowing history as a sequence rather than a snapshot. “If we all have a credit card balance of $10,000, but you’ve paid down your balance over time and increased your credit limit, the latter is considered a bigger risk, and the new model will take that into account,” says Jeff Richardson, spokesperson for VantageScore Solutions. In other words, if your trend line shows you paying down debt or better yet, paying your monthly balance in full, it will help raise your credit score. But if you are accumulating increasing credit card debt over the years and/or relatively frequently opening new credit card accounts, it will negatively affect your credit score. “It’s a big change from scoring systems [that only look] at a moment in time,” says Olthoeimer. “It tells a story about whether someone has paid down a balance because they are applying for something, or whether that person consistently pays their balance in full every month.”
This means that quick credit fixes before loan applications may not work anymore
With this in mind, how long do you need to clean up your credit before applying for a loan or credit? “I used to say 30 days,” says Olthoeimer. “I can’t give that advice anymore.” With vector data going back years, nobody will be fooled by paying down their balance to increase their credit score in the month they apply. And increasing your credit limits to use a lower percentage of your available credit won’t help either. “If you are someone with debt and you’re applying for a car loan or mortgage or credit card, and you can pay down a significant amount close to application, it won’t help you as much as it did in the past,” says Matt Schultz, senior industry analyst at CreditCards.com. In the new system, your score reflects your debt history, even if you currently have less of it.
Paying more than the minimum will benefit your credit score
The other difference is the consideration that the VantageScore model gives to your payments – not just whether they are on time, but how much more you put toward the minimum due. Paying more than the minimum is a positive indicator to lenders, making you appear to be a lower credit risk. Additionally, if you only pay the minimum, your debt is likely to continue increasing, which will negatively reflect on your credit score. “This [change in scoring] might help push a credit card user over the fence from being a revolver to a transactor, and that will save the consumer a tremendous amount of debt,” says Olthoeimer.
The new score is designed to be more forgiving and lenient
Finally, the new score relies less on derogatory debt collections and public records like mortgages and judgments and removes some medical debt collections. Moreover, it uses machine learning to help classify around 37 million consumers with thin credit files. This is good news for younger generations and other young people.
FICO will stay the same – for now
It won’t
The trend data is integrated into your FICO score formula, and FICO has downplayed the importance of changes to VantageScore. “The benefit they talk about is less for consumers and more about whether it adds predictive value for lenders,” says Sally Taylor-Shoaf, vice president of FICO Scores. “Consumers want to know the scores lenders are looking for; lenders use FICO more than 90 percent of the time.”
The industry varies regarding the market adoption rate of VantageScore credit scores, with 12.3 billion used between July 2018 and June 2019 by 2,500 lenders and other industry participants. However, even if FICO scores and VantageScores differ in their contrasting approaches, they are likely to tell similar stories. If you have good credit habits, you will receive good scores regardless.
With Kelly Holtgren
Source: https://www.thebalancemoney.com/new-credit-scoring-rules-4145347
Leave a Reply