Credit scores are not a new concept, but VantageScore® appears to be looking to change the way they’re formulated in a big way. Their latest model, VantageScore® 4.0, was released in October of 2017, and adoption is steadily increasing. Here’s what that could mean for your credit scores — and future credit opportunities.
Three Ways the VantageScore® 4.0 Is Changing Credit Scoring
1. There’s a Focus on Trended Data
One of the most important factors in credit scoring is credit utilization, which is the percentage of your credit limits that you carry a balance on. Typically, credit utilization is reported once during the month. There’s no easy way to know if that happens before or after you pay your bill (or to make sure your bill is paid before that happens). As such, your credit scores can suffer from what might be a temporarily high credit utilization rate.
VantageScore® 4.0 is looking to change that with trended data. The company’s vice president of communications and public relations, Jeff Richardson, explains:
“The simplest way to understand trended credit data is that the model will consider a consumer’s utilization rate over a period of time, instead of a particular month. For years, consumers have been punished for a single month of high utilization … however, with trended data, the model sees that a consumer usually has a lower utilization rate over an extended time period.”
Richardson goes on to say that VantageScore® is the first tri-bureau model to use trended data. He says that the trended data also considers other types of credit behaviors, such as those involving auto loans and mortgages.
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2. Credit Mix Becomes More Influential Than Payment History
If you look at FICO®’s credit scoring formula, there’s a high emphasis placed on payment history. So high, in fact, that it ranks at the top, accounting for 35 percent of a credit score. VantageScore® doesn’t show the percentages of each of their factors. Instead, the company categorizes them as “highly influential,” “moderately influential,” and so on. But, like FICO®, VantageScore® previously favored payment history.
That has now changed. In VantageScore®’s latest model, payment history has decreased to a ranking of “moderately influential,” placing it squarely in the middle of all the other factors. In theory, this could mean a late payment doesn’t have as large an effect on someone’s VantageScore® 4.0 credit score as it might on other scores.
That’s not the only factor to take note of. Credit mix, which is the combination of different types of credit in your name, is the lowest-ranking factor of FICO® credit scores, making up only 10 percent of the scores. However, VantageScore® 4.0 places credit mix in the second-highest ranking of “highly influential.”
In other words, if you only have one type of credit account (say a student loan or a credit card but not both), then your VantageScore® 4.0 score might suffer for it, while the effect will likely be minimal on your FICO® scores, as it has been for years. This isn’t a reason to take out a loan or line of credit you don’t need, but it is something to be aware of.
3. Total Credit Usage Becomes VantageScore®’s Most Influential Factor
Finally, VantageScore® 4.0 shows a change in the breakdown of credit utilization and total debt. Previously, these were two different factors that were “highly influential” and “moderately influential,” respectively. Now, they’ve been combined to top the credit score formula.
If you look at the breakdown of VantageScore® 4.0, in other words, you’ll see “total credit usage, balance and available credit” right on top of the chart with a description of these things being “extremely influential.”
As always, the debt you carry can impact all of your credit scores. It appears with this latest change that VantageScore® is taking this factor even more seriously than before.
What These Changes Mean for Consumers
As notable as these changes are, they don’t necessarily affect your life overnight. Companies can purchase whatever credit scores they like, and they’re not required to upgrade each time a company updates its model. For example, even though FICO® is up to its ninth model, FICO®’s consumer website says that FICO® Score 8 is its most widely used score.
The relative recency of VantageScore® 4.0’s release could mean the lenders you’re hoping to work with haven’t adopted it yet (nor do they have to). Still, Richardson said that adoption of this latest model is increasing, especially “in the credit card market and among fintechs in particular.”
More importantly, VantageScore® aims to score more people. “The net result,” Richardson says of the company’s technology, “is a model that can score some 40 million more consumers than other conventional models.” He goes on to say that they’re ”seeing that translate into adoption increasing by 20 percent year after year.”
The ability to do this is made possible, in part, because the trended data includes how many times someone has paid more than the minimum due on a credit account and the decline of a loan’s balance over time. Richardson says that “using this type of data allows the model to more accurately score those who are newer to credit than others because, by definition, age and type of credit penalizes them.”
More people having access to credit scores is important, as credit scores can dictate borrowing opportunities, and be pulled during processing of things like employment applications and insurance. Therefore, it’s important to understand all the ways your credit can be evaluated. The more you know, the more power you have to work towards your best scores, and the opportunities they might present.