Changes to the VantageScore system will be good and bad for different types of credit users.
The big three credit bureaus in the U.S. – Experian, Equifax and TransUnion – announced a major overhaul to the VantageScore credit scoring model. These new credit score changes will take effect later this year. Whether the new model is good or bad for your credit depends on your current score and usage.
Why VantageScore changes matter
If you know anything about credit scores, you know FICO is king. It’s the score used in 90% of lending decisions. However, VantageScore is the credit scoring model created by the three credit bureaus working together. Last year, creditors the VantageScore to make 8 billion credit application decisions.
So, while VantageScore changes probably won’t affect your mortgage application, they may affect your next credit card application. That’s important if for anyone currently working through a debt management program to eliminate debt. You may eventually decide to open a modest credit card account once you graduate. In this case, these new credit score changes will be highly beneficial for you.
What are they changing?
These are the main changes the bureaus want to make to the current model:
- “Trending data” will matter now. This means someone working to pay down debt would score better than someone that only makes minimum payments as their debt levels slowly increase.
- High credit limits may hurt you. In the old system, “credit utilization” mattered – if you had high debt but a high limit, your score would still be high. Now the new model counts down for high credit limits because you have the potential to run up more debt quickly.
- Civil judgments, medical debts and tax liens no longer count. If you have any of these public records on your profile, they would no longer count against you. Medical debt, in particular, damages scores for people who would score high otherwise. Congress moved several times to change the credit reporting system to remove medical debt, but gridlock stopped it each time. So, the credit bureaus took matters into their own hands.
Why these changes are good for anyone enrolled in a debt management program
When you enroll in a debt management program, creditors freeze all your current credit card accounts. You can’t make any new charges. Over the course of the program, you pay down the debt you owe. Once you graduate, you can apply for new credit. Your credit counselor team will always recommend that you should be discerning about opening these new lines. A lower credit limit is better because there is less opportunity for you to run up a problematic balance.
Once the new model goes into effect, this means debt management program graduates will get a boost for several reasons:
- Your treading data will lead to a good score because you are solely focused on debt repayment.
- If you open a modest new credit line, you won’t be penalized because of your credit utilization ratio.
- If you had any medical debts included in your debt management program, they won’t be negative remarks on your credit for the next seven years.
It’s a win-win-win. Just use your credit responsibly and pay off the debt in full at the end of each billing cycle. Under the new model, this will achieve a better credit score faster.
If you like to game the system for a high score, your strategy needs to change
While most debt management program clients should benefit from this new system, some people with current high scores may not. Tricks that used to allow people to “game the system” may hurt their scores under the new model:
- If you took out a number of cards and worked to get the highest limits possible to achieve a low credit utilization ratio, this will hurt you now.
- Your score could also decrease if you have a large number of open accounts because you like to maximize your credit card rewards.
- Anyone with a binge-purge credit use philosophy could see their scores fluctuate significantly. Every time you pay off debt your score would improve, but it would drop when you run up debt.
Luckily, if you use any of these strategies, the new system should make it easy to get on the right track. Just change your credit use strategy to fit the new system and your score can be golden.
For more information on Credit Scoring, we invite you to watch our Game of Good Credit video series. Learn how to maximize your score in a healthy, responsible way!