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Credit Scores can be a tricky business that requires good management and staying on your toes to obtain the highest score possible. Well, some people will have to ponder financial adjustments later this year, when the next revision of the VantageScore credit scoring model makes some changes to how it calculates credit scores. The improvements are designed to give a more accurate and representative picture of consumers’ behavior, according to a spokesperson for Vantage Score Solution.
An important point we want to make here is that this change is only to the VantageScore scoring model, and not the FICO models, which is the larger of the two scoring models used in the US.
The single biggest change to your score is the use of trends and trajectories. Your score will improve if you are making larger payments and paying down your debt. This is a marked change where previously your score would remain unchanged as long as you were meeting the minimum payments, even if you were accumulating more and more debt. Now, with a trend of taking on more debt, your score will take a hit.
The second change is with credit utilization—the amount of debt you have as a percentage of your credit limit. Currently, you should aim to have a lower utilization ratio, under 30%. So, for every $1,000 of credit limit you have you should maintain your debt below $300. Additionally, if you make a large purchase that bumps your utilization ratio your score will take a hit, but the new system will look more at your historic trend which will reduce the hit your score will take.
Another change will affect people with many cards or very high credit limits since regardless of your utilization ratio, those with extremely high credit limits will be punished, as they have the ability to take on an enormous amount of debt very quickly. As the system looks at your overall cumulative limits, you might need to consider closing some of your cards if you have a lot of them, since cumulatively they are giving you an over inflated credit limit.
The Reason for the Changes
Currently, there are two primary credit scoring systems being used: FICO and VantageScore. The new method, which only affects VantageScore, is designed to give a better picture on consumer defaults—which is an area in which FICO fell short during the last financial crisis.
While it is unclear which institution is using which credit scoring method, VantageScore is gaining traction fast, as of June 30, 2016. It is being used by 2,400 lenders and 20 of the largest 25 financial institutions. During that period 8 billion scores were used, which is a 40% increase on the previous year.
Any change that improves scoring and forecasting is great news since it reduces the risk to lenders and ultimately makes it cheaper for consumers, as well as giving them the ability to manage their credit. Needless to say, the key to credit management is to pay off your debts and bills in a timely fashion and showing a gradual reduction in your overall debt levels.
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