Credit scores have long been the bane — or boon — of homebuyers everywhere. This seemingly innocuous three-digit number becomes an all-powerful determiner that can either help you sail through the purchasing process or scuttle the deal altogether. That’s a big deal, so the news that the method for calculating credit scores will soon be reformulated is causing buzz throughout the real estate industry. The question is this: Will the change help or hurt those looking to buy?
Get to Know VantageScore
If you’ve ever monitored your credit, you’re probably familiar with the big three credit scoring companies: TransUnion, Equifax and Experian. Together, the trio created VantageScore, a Fair Isaac Corp. (FICO) competitor intended to combine and analyze consumer data in order to predict whether someone is creditworthy. Rather than FICO’s custom model, which is individually calibrated to account for differences between the databases used by the main three credit bureaus, VantageScore launched with a one-size-fits-all approach assessing the following:
- Payment history
- Age and type of credit
- Percent of credit limit used
- Total balances/debt
- Recent credit
- Available credit
But according to recent news, that’s about to change.
The New VantageScore Formula
VantageScore has announced an impending rollout of a new formula that will use “trended data” to calculate users’ credit scores. Rather than FICO’s snapshot of consumer credit, which can be extremely skewed if someone has hit a rough patch or recently made a number of credit inquiries or a major purchase, VantageScore’s new method will track borrowing behavior over a longer period of time.
What does that mean for you? Well, it depends. If you regularly carry a balance or have been steadily borrowing more and more, you may be perceived as riskier than someone who has been consistently paying down debt and achieving a zero balance each month. The upside for people actively searching for a new home is that you won’t have to be as cautious about putting an extra blip or two on your credit report because the long-term model is a bit more forgiving in that sense.
Consumers who don’t regularly use their credit lines will also benefit under the new model. In the past, shying away from available credit could actually lower your score, but now, the combination of a high-credit limit and fewer purchases would be more favorably looked upon and could even result in a boosted score.
Should You Change How You Manage Your Credit?
Big changes often inspire big action, but chasing a higher credit rating based on the new VantageScore model might not be the best plan. For one thing, VantageScore is just one player in the market, and even though they do big numbers, they’re small fish in comparison to FICO, which is still the top choice for most lending companies. Even if the VantageScore results are more favorable for you, it’s not smart to assume it’s the model your lender uses.
What You Can Do
Basically, the key credit behaviors experts have been recommending for ages still apply.
- Keep to a pattern. The more changes you make to your payment routines (missing a payment or paying less or far more than usual) can throw up a red flag.
- Don’t pay late.
- Apply for credit sparingly and do bulk applications within a 30-day window.
- Leave good debt (the kind you paid off) on your credit report. Good debt is better than no record at all.
- Limit balances to around 30 percent of your available credit.
- Check your credit regularly to ensure accuracy. You can use a site like AnnualCreditReport.com.