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
I have a VantageScore 3.0 versus VantageScore 4.0 comparison. I and P2 recently paid off large (0% APR) balances. I had 2 at 75% individual card utilization and P2 had 1 at 88% individual card utilization (though we had low overall utilization).
Our VantageScore 3.0s (on TU, EQ, EX from various sources) shot up by about 50 pts (FICOs more subdued at 20 pts up).
But P2 also has a VantageScore 4.0 (on Sync SC CC) and it didn’t even change by 1 point in the 2 months since the payoff.
That’s pretty strong evidence for the “trended data” being used. It could be that a delayed effect shows itself later.
Would a 0% introductory APR card impact the trended data factor, considering you would not be making payments on the card?
> 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.
It’s like they are trying to force me to pay off my 0% credit cards instead of keeping the money in a savings account…
Even if you do not have a civil judgement reporting, you will still have late payment(s) and or charge-offs.
The third bullet point concerns me most. Civil judgments say so much about a creditors willingness to pay his bills. This change hides critical information and damages the ability to effectively attract responsible borrowers. It’s time for us to start paying our bills so lenders will do more and more to get us to use their products. MS depends heavily upon a meaningful way to determine who to loan money.
Banks don’t lend money out of charity, so it ain’t all on borrowers. See the mortgage lending crisis of the last decade.
Looks like a catch 22 for guys like me. I only have a few cards with 10k+ CLs. Most are under that. CSR if I ever get the chance wants to see 10k+ limits.
Really depends on what they consider excessive credit limits, I believe it will look at total credit available rather than limits on specific cards as well.
Ha. “A few cards with 10k+ CLs.”
We have ~6x household income in total available credit. And I keep getting offers in the mail.