BIG CHANGES FOR YOUR CREDIT SCORE
Upcoming new formula could alter behavior of borrowers, spenders
New formula for credit scores might alter the behavior of both cautious spenders as well as riskier borrowers.
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.
Most notably for those with high scores: Abiding by the golden rule of “don’t close your credit card accounts” may now hurt your standing. On the other side, those with low scores may benefit from the removal of civil judgments, medical debts and tax liens as factors.
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.
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.
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.
But 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 might 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.