NEWS: The two major credit scoring agencies – FICO and VantageScore – announced late last year that their calculation formulas are changing to include trending information from the past 24 months. Many of those changes have taken place, or will by the end of this year or next year.
WHAT THIS MEANS TO YOU: In the coming months, you could see a big change in your credit score (for better or worse), or suddenly have a credit score when you didn’t before. It will particularly affect people who plan to apply for a mortgage in the coming years.
When I first started writing this column in January 2022, one of the first things we tackled was the credit score – you know, that little number that has such a big impact on so many aspects of your financial life.
Changes that are underway this year in how credit scores are calculated may also mean changes in your credit score. If you don’t have a credit score, the changes may generate one for you, particularly if you pay monthly rent, cellphone and utility bills.
Hold onto your hat, because if the whole concept of credit score confused you before, it’s about to get a lot more confusing. The good news is that if you make credit card and other payments on time, don’t max out your credit accounts, and are intentional about what credit you apply for, you’ll still come out on top.
Question: Before you tackle this year’s credit score changes, can you remind me again what a credit score is and how they figure it out?
Answer: A credit score is an easy way for lenders (and others) to determine if you’re going to pay your bills on time. Lenders want to know this before they give you a loan. Landlords, insurance companies, and even potential employers may also check out your credit score to determine what kind of risk you are.
Your credit score has nothing to do with how much money you make, what your assets are or if you have money saved. It’s all about how good you are at borrowing money and paying it back.
While “credit score” is used generically, there are two major credit score calculating services: FICO and VantageScore (we’ll call it Vantage for the rest of this column). Vantage calculates credit scores by drawing information from all three credit reporting agencies: Experian, Transunion and Equifax. FICO generates separate scores for each agency, and also provides seven versions of its scores, based on past calculating formulas, for lenders to choose from.
With both scoring services, scores range from 300 to 850. You don’t hit “good” with FICO until 670. With Vantage it’s 700. That said, a score of 620 is generally what’s needed to get many loans, credit cards, and other borrowing products.
The higher your score, the lower interest you pay on credit cards, loans and insurance premiums. You are also offered more options when shopping around for loans, pay fewer fees, and generally pay less for everything.
Lenders and other businesses pay the companies to access scores, with some versions costing more than others. Mortgage lenders pay the most and access the most FICO versions of scores. They’ll usually average your score based on all the numbers they get. Other lenders, landlords, insurance companies and more, tend to rely on FICO 8, also known as Classic FICO. Others use Vantage. Many use both.
You don’t have a choice about which score a potential lender sees, or even who sees your score. Any business that pays for the service has access. The score provided to you is a general look at the separate scores businesses see, but you can also pay FICO to see the various versions of your score.
Credit scores are drawn from your credit reports, which lenders and other businesses provide information for. Not all businesses provide information to all of the credit reporting agencies, which means your score may vary wildly.
Your credit scores are updated every 10-30 days.
It used to be difficult to get your credit score – you had to request and pay for it. These days, most banks, online lenders and credit unions will provide one free. If the company where you keep your money has this service, take advantage of it. Seeing your score is a big step toward improving it.
Q: That’s all well and good, but I’m not sure what to do with all that information. Do I have any control over this at all?
A. You have total control. No matter how many credit scores are out there, or which ones lenders use, the path to a good credit score hasn’t changed.
The things that affect your credit score, in order of importance, are:
On-time payments. Pay your credit cards, loans, mortgage and any other bills on time. Any time you’re 30 days late, it goes on your credit report. When you’re 60 or 90 days late, it has even more of an impact. Consistently paying on time will allow late payments to fade into the distance and count against you less. On-time payments count for 41% of your Vantage score and 35% of your FICO score.
Credit utilization. The more of your available credit that is used up, the worse your score will be. For instance, if you have two credit cards, each with $1,000 limits, and every month they are maxed at $1,000, that will lower your score. Most lenders like to see 30% utilization at most, which means you’d shoot for $300 balance or less on each $1,000 card. This counts for 30% of your FICO score and 21% of your Vantage score.
Credit inquiries. Any time you apply for credit, even if you don’t get it, this is a “hard inquiry” on your credit report. Credit cards, auto loans, mortgages, store cards, rent-to-own furniture, store cards – you name it, they all require a hard credit pull. If you have more than two or three within two years, that’s a hit to your credit score. You can often check rates for online loans or an auto loan online with a soft inquiry – this is just a rate check. If you go forward and apply, it’ll be a hard check. Be sure if you’re doodling around online looking at loan or credit card rates, it’s clear what kind of credit inquiry will happen before you do it.
Credit mix. A variety of different kinds of credit – credit cards and loans – looks better to lenders because it shows you can manage credit.
Credit history. The older some of your accounts are, the better it is for your credit score. For instance, if you’ve had the same credit card for 30 years, that shows you can manage an account long-term. A tip on this: If you have a credit card you’re not using, don’t close the account. Consider using it for a purchase here and there, and then paying off the balance, just to keep it active. It’ll help your credit score.
Q. So, what’s changing?
A. FICO and Vantage have tweaked their calculations to make credit scores more accurate predictors of who’s a bad risk, as well as to be more inclusive to populations that traditionally have been left out of getting credit, or discriminated against. The catch is that businesses that lend money may still use older versions, so you may not see a change at all, depending on what kind of credit you are applying for.
The people who will definitely see a change are those applying for mortgages.
The new models are FICO 10 and 10T and VantageScore 4.0. Federal mortgage backers Freddie Mac and Fannie Mae will use FICO 10T and VantageScore 4.0.
FICO estimates the changes with 10T will increase mortgage approvals by 5%, and decrease mortgage delinquency predictions by 17% for people whose credit score is 680 (in most cases the bottom score needed for a traditional mortgage). It also predicts that FICO 10 will decrease auto loan delinquency predictions by 9%, and 10T 10%. A delinquency prediction decrease in layman’s terms means a higher credit score and more likelihood of a borrower getting the loan.
The changes are:
Trended data for past 24 months included. This is a good news/bad news change. If you’ve been good over the past two years about paying your bills and handling debt, this will increase your score. If you’ve been good, but not as long as 24 months, it will hurt it. While credit reports keep seven years of payment and credit information, previous credit scoring only used current information. The new method will include payment and utilization information for the previous 24 months. If this makes you cringe, keep in mind that the time to start good credit habits is now. The better you do going forward, the more your credit score will improve. The change is for FICO 10T and VantageScore 4.0. FICO 10 isn’t using this – the T in 10T stands for “trended.”
Paid debt collections no longer count. The changes to how debt collection is regarded by credit scoring models has been slowly changing with previous tweaks. A debt collection that you paid will remain on your credit report for seven years, indicating to lenders that there was a bill that you let languish for so long that it got sent to a collection agency. FICO 10 and VantageScore 4.0 don’t count a paid collection account in a credit score calculation.
Unpaid medical bills count for less. Unpaid medical bills can pile up and are often quickly sent to debt collectors, which can tank a credit score for someone who otherwise is doing a good job of making monthly payments. FICO 10 won’t count unpaid medical bills that are in collections if they’re less than $500 and aren’t more than 365 days overdue. VantageScore 4.0, like its predecessor 3.0, doesn’t count unpaid medical bills in collections, no matter what the balance.
Rent, utilities, telecom payments included. Rent, utilities and telecom (like cellphone) payments will be included in FICO 10 calculations, but not VantageScore. FICO says the change will help make their scoring more accurate since it includes regular payments people make that aren’t traditional debt payments, but it’s also good news for people who haven’t had the opportunity to generate a credit score. The big catch, though, is that it only happens if the landlord, utility or telecom company reports to the credit reporting agencies. If you want your on-time payments to count so you can generate a credit score, ask the company (or person, if it’s a landlord), to report to the agencies.
Vantage’s new AI model. To include people without a credit history, Vantage is using machine learning, a subset of artificial intelligence that use algorithms that mimic how people learn. The past scoring models required at least six months of credit history or at least one update to their credit report every six months. The new model means 37 million more consumers will have credit scores, according to Vantage. That breaks down to:
- 5.5 million Black consumers; 1.3 million with scores over 620
- 5.2 million Latino consumers; 1.7 million with scores over 620
- 24.2 million white consumers; 9.2 million with scores over 620
- 1.4 million Asian consumers; 0.6 million with scores over 620
- 250,000 Native American and Pacific Islander consumers; 100,000 with scores over 620
Q. That’s a lot to take in, and I don’t plan on getting a mortgage, so it probably won’t affect me or my credit score, right?
A. While consumers have access to credit scores, they were, and are, created for businesses. They’re a tool for lenders and other businesses to decide whether to lend you money, how high an interest rate to charge you, how high they can go on fees, what fees to charge, and even whether to rent you an apartment or give you a job.
You have no way of knowing which credit score a lender or other business will use, or when.
The best strategy is to monitor your credit score. Ask your lender if you don’t already have the option. I have accounts with two banks and a credit union and all three provide a constant credit score.
As you’re keeping an eye on your credit score, do everything you can to improve it. For tips on that, check out my January 2022 It’s Your Money column.