There are some major changes coming to credit scores. One particular change could hurt those with historically high scores.
There are three major credit agencies—TransUnion, Equifax, and Experian. The Fair Isaac Corporation (FICO) takes the information from these credit agencies and calculates your score. FICO considers your payment history, credit utilization, length of credit history, credit inquires and new debt, and types of debt. The FICO score is used for most mortgages.
So what is the big change here?
In the past, tax liens and civil judgments were included in your score’s calculation. The impact, of course, was always negative. Unfortunately, there were a lot of reporting mistakes when it came to tax liens and civil judgments. So they are doing away with these items on your report this summer. This should cause some credit score ratings to increase. Unpaid medical bills can still show up. However, last year the reporting agencies implemented a 180-day waiting period before these bills hit your report.
What else is changing?
While FICO still exists, the three credit agencies created a new company called VantageScore. There are similarities in the way VantageScore calculates its score when compared to FICO. However, there are a couple of big differences.
First, VantageScore considers trends. This means that the score will take into consideration the direction of your debts, whether they are increasing or decreasing. So decreasing your debt will likely increase your score. However, there is a flipside to this. If your current score is high, a negative debt trend could decrease your score even before you miss any payments.
Second, VantageScore does not reward you for excessively high available credit limits, even if they are unused. Under their calculation, high available credit limits is viewed as a risk. Having a $1,000 credit card balance with $34,000 of unused credit won’t necessarily help you like it may with FICO. In fact, it may hurt your score.
As it stands, FICO will still rule the mortgage world. Fannie Mae and Freddie Mac require it. However, VantageScore is picking up steam in the credit card world.
Why should I care about all of this?
That is a good question. You should first care about following God’s design for your money—Give generously, save wisely, and live appropriately. But don’t discount the impact your credit score has on getting a mortgage and, sometimes, getting a job.
Monitor your credit on a regular basis. Look at it at least once a year. There are only a few situations when you need a credit score. But it is very beneficial to have a good score when those moments do occur.