Seattle Times just published an article titled “Major changes coming to how your credit score is calculated“. Several readers asked my thoughts on this. First of all the title is extremely misleading as the VantageScore isn’t commonly used by lenders. The last reliable numbers we have show the following:
- A FICO score is used in 90% of lending decisions
- VantageScore score is used in less than 6% of lending decisions
Now that we have that out of the way, let’s look at the changes VantageScore will be introducing for version 4.0:
- Trended data will be used. Currently VantageScore only looks at one credit report in isolation, trended data will allow the score to see how your behavior is changing over time. For example if somebody has only been paying their minimum balance for several months then they are likely to start defaulting on their loans than somebody who has been paying their balances in full.
- Excessively large credit limits will cause a score to drop. Currently VantageScore looks at your credit utilization (total debt / total limits). They will now negatively mark your score down if your credit limits are excessively large, no example is given of what excessively large means and likely this figure varies based on your overall credit profile.
- Civil judgements, medical debts and tax liens will no longer be counted. This is part of an agreement that the three nationwide credit bureaus and 31 state attorney generals made back in 2015.
- Changes will go into effect later this year.
Our Thoughts
Like I said, FICO score (and it’s variations) is the main one to be concerned with. That being said a lot of the free credit monitoring websites offer VantageScores so if you see a dramatic change then it’s likely due to one of the above changes. It’s also worth mentioning that it’s not clear what sites/lenders will switch to the new 4.0 model, there is usually significant lag between a new model being introduced and used.
Hat tip to /r/churning
