Q: I’ve heard VantageScore is getting an overhaul. What are the changes and how will this affect my score?
A: The VantageScore, which dictates the way credit bureaus determine your credit score, is getting a shake-up this fall. Therefore, it’s wise to learn all you can about the three main areas that will change so you can make the necessary adjustments to your credit behavior.
1.) Trended data and trajectories
First of all, VantageScore will start considering trended data. This means the company will analyze the direction of your debts on a monthly basis. Are you gradually paying down your debt, or are you scraping by with the minimum payments as your balance slowly grows?
If you’re careful about making the monthly payment but your balance is increasing each month, your credit score will take a hit. On the other hand, if you’re working toward paying down debt, your score will likely get a boost. Even small steps will be recognized and rewarded.
2.) Large credit lines
Next, having lots of available credit was once considered a mark of good credit. The new VantageScore hurt borrowers with excessively large credit limits. The theory behind this rationale is simple: Lots of credit isn’t good because the borrower can quickly rack up a huge bill.
If you have a large line of credit available, you will be negatively impacted by this change unless you take action. This change upends the advice that the more credit cards you have open, the better. The rationalization behind that maxim was to build your available credit and thus improve your score. With the modified system, though, the opposite is true.
Therefore, it’s best to use less than 30% of your available credit. If you have a large credit line open across several cards, consider closing some of your cards to lower that number. Also, if opening a new card, ask for a smaller credit limit over a larger one.
3.) Medical debt, tax liens, and civil judgments
Finally, medical debt, tax liens, and civil judgments will no longer be factors at play in determining your credit score. Tax liens and civil judgments are often erroneous and harm a credit score. Similarly, medical debt can hurt credit scores before insurance can reimburse the borrower for the payments.
If you’ve had any of the above dragging down your credit score, you can celebrate because you might see a jump of 20 points to your score! On the flip side, if you have negative marks from delinquencies and debts that have gone to collection agencies, this new rule won’t help you.
Your Turn: Does the new system encourage responsible use of credit? Share your thoughts with us in the comments!
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