One of the first pieces of advice I give to those interested in buying a home is that you shouldn't make any big purchases and watch how you're spending in regards to credit. More specifically, don't do anything that may affect your credit score. So, no late payments, no adding to current debts, and no closing of credit lines (because creditors like to see a long and varied history).
However, over the past couple of days many news outlets are reporting that VantageScore, a company created by credit bureaus Experian, TransUnion, and Equifax, is making a change to the way it runs and scores credit. Though, Fair Issac Corp. (the company behind FICO socres) is more well-known and used for a majority of mortgages, this change may induce change to the entire industry. So, here's what you need to know about how VantageScore is changing their scoring system.
First, the use of trended data will play a major role. According to a recent article on USAToday, trended data "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." That makes sense, though. Shouldn't those paying off debt be rewarded with a higher score? Forbes quoted John Ulzheimer, a nationally recognized expert on credit reporting, credit scoring, and identity theft, in saying, "people who do not pay their cards off in full each month are 3 to 5 times riskier than people who do pay in full each month."
Second, the change "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." This, too, makes sense from a borrower's perspective; and yet goes against many of the credit score tricks and tips people have been used to hearing for so long.
The third large change is that civil judgments, medical debts, and tax liens are now out of the equation "after a 2015 agreement between the three credit bureaus and 31 state attorneys general." The argument was that civil judgments and tax liens were often full of errors; and that medical debt was being reported on before insurance had the chance to reimburse. People with these items on their credit reports could now see a bump of as many as 20 points.
The good news, for now, is that mortgages aren't being affected. Government-owned Fannie Mae and Freddie Mac require a FICO score, which hasn't adopted these changes. However, with a big change like this it's hard to tell if one company really won't have an eventual affect on the other. Definitely something to keep an eye on.
Questions? Please, don't hesitate to contact me for any and all real estate needs.