Big changes are in the offing for credit scores in the United States. Many folks are unaware, but a major overhaul is coming to the way credit scores are calculated. This will affect people across the spectrum – big spenders and cautious borrowers alike.
We all know that many factors go into computing your credit score. These include your total credit usage ratio, timely payments, number of new accounts opened, how long you have had credit lines, judgments, liens and other orders, etc. It can be a confusing mishmash of data that you’re having to juggle every time you try to improve your credit score.
The Trend May Not Be Your Friend
Fortunately, the are several failsafe tips to help you get the most out of your lines of credit so that you can stay on top of your repayments, and steadily increase your credit score. It’s important to understand how your credit score works, because it impacts the interest repayments that you are obliged to make on lines of credit, and the type of spending limits that you will be privy to.
A brand-new method is now being adopted by VantageScore. This new credit scoring system typically handles up to 8 billion account applications per annum, and it is this score that approves or denies your credit application. The big change comes in the form of trended data.
Making Minimum Payments While Racking up Debt Is Disingenuous
This means that your current credit usage and payments will be more significant in determining your credit score than your past behaviour. Month-to-month credit decision-making processes have a much more significant impact on credit providers because it determines your current financial status and how likely you are to make good on your payments, or default. For example, an individual who has been accumulating credit card debt over time by simply making minimum monthly payments would score lower than somebody who is paying down their credit card debt every month.
This is likely to benefit people that have been getting their financial affairs in order, but it may not bode well for people with high credit scores who fail to pay down their debts beyond making minimum monthly payments. This is future-oriented credit monitoring since it utilizes current data to gauge your risk profile. Trajectories provide the clearest possible evidence of future patterns. If a customer is spending increasingly more on credit, and failing to meet minimum repayment amounts in a timely fashion, he or she is at risk of defaulting.
According to the old model, the availability of your overall credit plays a big part in determining your risk profile. Somebody who has used up $10,000 of a $100,000 credit line was in better standing than somebody who used up $2000 with a $15,000 credit line. The new scoring system does the opposite. It sees a high credit limit as a possible risk to the credit provider. In other words, someone with a $50,000 credit line is assumed to be able to use up that entire credit line and then be a huge risk.
What about Student Loans?
One of the biggest burdens to the average American household today is rising student debt. In fact, the latest indicators reflect that automobile loans and student loans have been increasing while the impact of mortgages on household debt has been decreasing. There are multiple credit facilities available for students, including loans, bursaries and grants. One such avenue available to prospective students and graduate students is federal student aid.
The high fees of college tuition necessitate a well-structured plan to acquiring the necessary funding for college tuition. A FAFSA guide is particularly useful since your eligibility is not affected by your income, and successful applicants qualify for low interest loans that can help to repair your credit as well.
Applying for a Mortgage?
People who use their credit sparingly with less overall credit may score higher. And, on the plus side, the new system takes a more favourable view of liens, judgments and debt. In other words, you would not be as badly affected by these issues since they are often inaccurate and adversely impact your credit score. It has been estimated that people with liens or judgments could see a 20-point rise in their credit scores when the new model is rolled out this year. Be advised that mortgages will not be affected by the VantageScore model since lenders use FICO to determine your eligibility.