New Credit Score Rating System

NEW YORK —
The math behind your credit score is getting an overhaul, with changes big enough that they might alter the behavior of both cautious spenders as well as riskier borrowers.

 

Beyond determining whether someone gets approved for a credit card, a credit score can affect what interest rate and what spending limit are offered.
The new method is being implemented later this year by VantageScore, a company created by the credit bureaus Experian, TransUnion and Equifax. It's not as well-known as Fair Isaac Corp., whose FICO score is used for the vast majority of mortgages. But VantageScore handled 8 billion account applications last year, so if you applied for a credit card, that score was likely used to approve or deny you.
Here's what you need to know:

Paying down debt will help your score
Using what's known as trended data is the biggest change. The phrase means credit scores will take into account the trajectory of a borrower's debts on a month-to-month basis. So a person who is paying down debt is now likely to be scored better than a person who is making minimum monthly payments but has been slowly accumulating credit card debt.
People with high credit scores may be affected the most, since the goal of trended data is to see warning signs long before a borrower actually gets into serious trouble.
"When it comes to prime borrowers, you may not have bad behavior on your credit file, but a trajectory provides very powerful information," said Sarah Davies, senior vice president for research, analytics and product development at VantageScore.


The change also shakes up the maxim that had people keeping open accounts they'd opened long ago. An important metric in calculating credit scores has been the portion of their available credit people are actually using. A person with $5,000 in credit card debt with a $50,000 limit across several cards could score better than someone with $2,000 in debt on a $10,000 limit because of that ratio.


Excessive credit card limits will hurt your score
VantageScore will now mark a borrower negatively for having excessively large credit card limits, on the theory that the person could run up a high credit card debt quickly. Those who have prime credit scores may be hurt the most, since they are most likely to have multiple cards open. But those who like to play the credit card rewards program points game could be affected as well.


Civil judgments, medical debt and tax liens will no longer affect your score
Taking those items out of the equation comes after a 2015 agreement between the three credit bureaus and 31 state attorneys general. The argument was that civil judgments and tax liens —which can significantly hurt a person's credit score — were often full of errors. Medical debt was being reported on a person's credit report before there was time for insurance to reimburse.
People with those items on their credit reports now could see a bump of as much as 20 points. But it won't help much if they also have negative marks like delinquencies and debts that have gone to collection.


Mortgages won't be affected
The government-owned mortgage companies Fannie Mae and Freddie Mac require a FICO score for eligibility. Because of their outsized influence on the market, few mortgage lenders use VantageScore
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