By Jill Jaracz


5 Min. To Read

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Applying for a new credit, an auto loan or a mortgage? You'd better hope that your credit score is good. This is a three-digit number that signifies what type of borrower you are, which is basically how well you manage money and debt and if you're likely to default on a loan. It also determines whether or not a lender will let you borrow any money--and if they do, how much they'll loan you, which in the case of credit cards is the spending limit on your card account. Credit score also helps determine what the interest rate on your card, loan or mortgage will be.

Two of the big players in the credit-scoring world are Fair Isaac Corp., which produces the FICO score. This score is used a lot in determining approval in mortgages. The other is VantageScore, a company formed by Experian, TransUnion and Equifax--aka the three major credit bureaus. According to VantageScore, it handles the bulk of credit card applications--more than 8 billion last year alone.

VantageScore has decided to change the model by which it calculates credit scores and announced that it's releasing VantageScore 4.0, which is supposed to align with the way the three credit bureaus deal with some types of incidents that can negatively affect a consumer's credit score but aren't related to money that was borrowed. These include medical collections, tax liens and public debts like traffic or parking tickets.

Although outstanding medical bills can still negatively affect credit scores, with VantageScore 4.0, those bills won't be included in credit score calculations until they're at least six months old because it can take a while for insurance companies to settle payments. Any paid medical collections will not be included in factoring the score.

VantageScore says its new score will rely on "trending credit data," which looks at how a borrower acts with credit, meaning it looks at whether you're paying off credit card debt or just making the minimum monthly payments and adding more debt to that (hint: paying down debt would net you a better score under this method). Looking at these measures is supposed to give a better view of consumer habits--and show signs if a consumer could get into serious debt trouble. Even though it's a new scoring model, VantageScore may go back through two years of data when calculating your score.

This new credit scoring model may help those who don't have much of a credit history--and hence, have a hard time getting a credit car--by using "machine learning techniques" to predict a consumer's credit score. It may also ding you if you have open credit card accounts that you don't use or high credit limits. In the past, it was a good thing to show a long credit history or show that you had a large credit limit and didn't use it. However, if you have a large unused credit limit--such as if you're one of those people who have credit limits in the tens of thousands of dollars, VantageScore could see that as a negative because you have the potential to quickly get into a serious amount of credit card debt.

If you're worried that the new score might negatively affect your ability to get a loan or credit card, you don't have to worry just yet. VantageScore 4.0 won't come out until this fall, and even then, lenders will likely spend some time testing it before they actually start using it. So it'll be a while before you'll see the effects of the new score on loan and credit card applications or when you look up your credit score. That means you've got some time to manage your money wisely to make sure the new score will benefit you.

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