New Credit Scoring System Makes Paying Off Bill in Full Every Month More Important
Trended credit data shows whether you paid off your credit card balance in full or revolved it to next month
A new credit scoring system has been developed that will benefit both borrowers and lenders: VantageScore 4.0.
The Original System
The original VantageScore system was developed in 2006 by the three major credit reporting agencies: Experian, TransUnion, and Equifax. The score, which ranges from 300 at the lowest end to 850 at the highest, can be bought from any of the three agencies. It is often used by lenders when deciding whether or not to extend credit to a potential borrower.
The New System
The new system differs from previous generations in one crucial way: it looks at your trended credit data. This data is essentially your payment history in detail. It shows whether you're paying off your credit card balance in full every month or paying the minimum required and carrying the leftover balance over to the next month.
According to a TransUnion analysis, borrowers who carry over a balance are three to five times riskier than those who do not. Before this new system, it was not possible for lenders to tell which borrowers paid off their full balances each month and which did not, so it was harder to tell which borrowers were more risky.
The system will now take such trended data into account when calculating a borrower's credit score, which will help lenders better identify the best candidates for a loan.
VantageScore 4.0 will become available in fall 2017.
What This Means for Consumers
The new scoring system will make a big difference for consumers hoping to take out a loan. It will affect you in the following ways:
- It will be more important to pay off your full balance every month.
- Liens and judgments will hurt your score less.
- Your score will not be hurt by medical collections less than six months old.
When you carry over a balance, you're already paying interest on that unpaid amount. Under the new VantageScore system, carrying over a balance will also include the disadvantage of lowering your credit score and making it seem like you're a greater risk to lenders.
The other side of the coin is that those who pay off their balance in full each month will see their credit score go up, making you less risky. Plus, you won't be paying interest.
As of July 1, 2017, the credit reporting agencies will take most judgments and about half of the tax liens off of consumers' credit reports. Because there will be fewer of these items on your reports, the new system is designed to rely on them less when calculating your credit score.
The new VantageScore system will not take into account any medical collections less than six months old, so your score won't be hurt if you have any.
In addition, the credit agencies are going to take off of your credit report any medical collections that have been paid or are being paid by an insurance company so that a slow insurance claims process won't hurt your credit score.
Finally, if you do have any medical collections more than six months old that insurance will not pay for, the new system will count them less so they will not hurt non-medical collections as much.