Ch-ch-changes Are Not Unusual In Credit Scoring Formulas

Understanding what they mean for you can help, but experts say there is no reason to stress

Chances are pretty good that during your lifetime there are only two three-digit numbers that will have similar ability to get your pulse racing. The first are your SAT scores. How close you came to 800 on that math or verbal section of the test probably made a pretty big impact on your future. The second? Your credit score – and while those SAT digits had an impact for an early year or two, your credit score will impact your financial life for, well, ever. But, just like the College Board, every once in a while the companies that compute scores change up the formula.

That’s what’s happening in the credit scoring world right now. But don’t worry. We’ve got you.

Many Credit Scores

When you talk about your “credit score,” chances are pretty good you talk in the singular – as if you have a single one. Actually, you have many. And, those scores might be slightly different depending upon when in the cycle you pull your score as well as the credit bureau (Experian, Equifax or TransUnion) that provided the data.

Then there’s the fact that there are two main companies that tally these scores, FICO and Vantage. FICO is the older of the two, and still the most used. But VantageScore, though newer, is gaining steam. (FYI, it’s the score you get through SavvyMoney.) They are similar in many, many ways. Both “assign a [three-digit number ranging from 350 to 850] based on your credit worthiness,” says Greg McBride, Chief Financial Analyst at Bankrate.com. The higher your score, the better. Both are compiled based on weighting systems of pretty-much the same factors, like how often you pay your bills and how much debt you carry. And both are designed, McBride explains, to be predictive of how much of a risk you pose to the lender (in other words, what’s the likelihood you’re not going to repay that debt.)

“Trended Data” and Medical Collections

Every so often, as I noted above, the credit scoring models get a tune-up. They release a new version of their models that, over time, lenders will adopt because it allows them to more accurately predict how likely you’ll be to pay your bills. Then they can use that information to decide whether to loan you money and how much to charge you.

There are two changes to the formulas that should be on your radar right now. The first involves something called “trended data,” which VantageScore incorporated in its last iteration and where FICO is now following suit. Trended data is essentially a look back. Instead of seeing your score as a snapshot of your bill-paying and other credit behavior, it’s more of a timeline – giving you points (or demerits) for whether your credit habits are moving you in the right direction, or not.

The easiest way to explain this is with an example. Say there are 3 people who each have $5,000 balances on a single credit card. The first person is paying her debt down. She has $5,000 now but a few months ago she had $7,000. The second person is taking on debt. She has $5,000 now but a few months ago, she had $3,000. And the third is a points-hound who racks up the same $5,000 in debt every month and then pays that bill off in full. Trended data allows the credit scoring companies to see that picture over time, explains Jeff Richardson, Vice President of Marketing and Communications at VantageScore. The third person would be viewed most favorably, then the first, then the second. And it’s not just a credit card thing, he notes. “We’ll look at auto and other installment loans and reward people who are paying more than the minimum due.”

The other important change says Beverly Harzog, Credit Card Expert and Consumer
Finance Analyst for US News and World Report, is that the newest version of VantageScore is ignoring medical collection costs that are not yet 6 months old. “Sometimes it takes that long to get things ironed out with insurance companies so it was unfairly penalizing people,” she adds.

Good Habits Win

So, what should you do in reaction to these changes? Keep your credit behavior clean if you’ve already got a good score, or improve it if you haven’t. Although the formulas are slightly different, both credit scoring companies reward pretty much the same good behavior. If you want a good score pay your bills on time, every time. Keep your credit utilization (the percentage of your credit lines that you are actually using) below 30% of what’s available to you. Don’t apply for credit you don’t need (which keeps inquiries into your credit to a minimum). Don’t close old accounts you’re not using (except the ones that are charging you fees) which keeps the length of credit relationships long (a good thing). And try to maintain a mix of different types of credit.

The bottom line, Harzog says: Don’t panic. And don’t obsess. The SAT may be a sprint you run for a year, maybe two. Credit scoring is a marathon that lasts a lifetime.

Jean Chatzky

Jean Chatzky