For better or worse, your credit report tells a story that can have a big impact on numerous facets of your life. While most of us are well aware that our credit score and credit report play a crucial role in determining whether we're approved for a home loan or a new credit card, they bear far more uses.
For example, if you're looking to rent an apartment, condo, or house, the landlord is probably going to want a peek at your credit report. If he or she sees a number of late payments, collections, or repossessions on your account, you may be denied the home of your dreams.
Similarly, prospective employees might request access to your credit report and base at least some of their decision on whether to hire you or not based on what they find. If you have a pretty clean credit report, it could imply that you're a responsible individual that they'd like to hire. Conversely, late payments and other red marks could suggest that you're an individual they'd be best off avoiding.
Your credit report can also influence what you pay for auto and home insurance -- studies have shown that people with poor credit scores tend to cost insurers more -- as well as influence how much money you'll need to put down as a deposit to start utility services.
Your credit report is probably far more important than you realize. Thus, it's important to take note of any changes that are made to the credit scoring system.
Big changes are coming to the VantageScore model
As reported earlier this month by Credit.com, VantageScore Solutions is introducing a fourth version of its credit scoring model this fall, complete with three big changes.
While most of you are probably familiar with the more traditional FICO scoring model, the VantageScore model is used by all three of the credit-reporting bureaus (TransUnion, Equifax, and Experian). Unlike the FICO scoring system which is akin to a bare-bones scoring model that's static across all three bureaus, the VantageScore model is tailored for each bureau, which is why your score can differ a bit from one credit-reporting bureau to the next.
The main factors that weigh into the VantageScore model are:
- Your payment history
- Your age and the types of credit accounts you have
- Your credit utilization percentage
- Your total debt balance
- Your recently opened accounts and account inquiries
- Your available credit
VantageScore places the most weight on your payment history, quite a bit of weighting on your age, credit type, and utilization percentage, moderate weighting on your current debt balance, and less weight on your recently opened and inquired accounts, as well as available credit.
Three credit-score changes you need to know
Here are three ways this tailored credit-scoring model for the three reporting bureaus will be changing this fall.
1. More predictive "trended data"
Your credit report can be best described as a road map that establishes how responsible you are with your available credit to lenders. The more data points that current and prospective lenders have, the more reliable that data is.
The first big change is that the next version of the VantageScore model won't look at simply a single month of your debt balances. Instead, it'll observe how your debt balances have changed over a period of a couple of months. This should make the scoring up to 20% more predictive than the previous scoring model and give lenders a more accurate picture of your credit-use habits.
It'll be especially helpful to those with good or excellent credit who might have had their VantageScore generated at an inopportune time in the past (i.e., prior to paying a large credit bill). With their balances being viewed over multiple months, those with good and excellent credit scores and reasonably low credit utilization and balances should benefit.
2. The exclusion of select public record information
This change should be especially exciting for those with a poor, fair, or good credit score. According to VantageScore Solutions, quite a bit of public record information will be excluded in the new scoring model, including tax liens and judgments against individuals. Liens can stay on a person's credit score for quite some time.
Additionally, medical collections aren't slated to show up on a person's credit report until after six months have passed. The reason is that it can often take time to decipher whether a medical payment is the responsibility of the consumer or the insurance company. VantageScore's new model will allow six months for this responsibility to be properly sorted out.
3. New scoring techniques for those with minimal credit history
Lastly, the new VantageScore model will lean more heavily on machine-learning techniques to help score persons who have very little credit history. The model will examine thousands of various consumer behaviors in an effort to identify those who have a propensity to pay their bills on time, because these are the people that lenders want to attract.
According to VantageScore Solutions, this third component should make the fourth version of this credit-score model 17% more predictive for those who haven't used credit within the last six months, and 30% more predictive for people without any activity on their accounts, aside from collections.
The foundation for a good credit score remains the same
However, it's important for consumers to realize that the backbone of the VantageScore and FICO system isn't changing. This essentially means that the five building blocks for a good credit score are still vitally important.
If you want a good or excellent credit score, you should aim to do five things:
- Pay your bills on time: It's no secret that your lenders are looking for you to be responsible and meet your end of the bargain by paying your bills on time.
- Keep your credit utilization under 30%: Add up your aggregate available credit across all of your credit cards and try to keep your combined credit usage under 30%. Any more than 30% and it could signal irresponsibility on your part and cause creditors to question whether you can repay your debts.
- Keep good-standing accounts open: While closing little-used credit accounts might seem like the responsible thing to do, closing good-standing accounts that've been open for a while is a bad move. Keep even minimally used good-standing accounts open for a long period of time.
- Manage both types of credit: Prove to lenders that you can handle both types of credit, revolving and installment. Installment loans are fixed monthly payments, such as a car loan or mortgage, while revolving loans vary based on your balance, such as a department store credit card.
- Open new accounts only when necessary: Lastly, understand that opening new accounts can ding your credit score. Open new credit accounts only when it makes financial sense to do so.