Major Changes Coming To How Your Credit Score Is Calculated

By Ken Sweet, AP Business Writer

NEW YORK – The math behind your credit score is getting an overhaul, with changes big enough that they might alter the behavior of both cautious spenders as well as riskier borrowers.

Most notably for those with high scores: Abiding by the golden rule of “don’t close your credit card accounts” may now hurt your standing. On the other side, those with low scores may benefit from removal of civil judgments, medical debts and tax liens as factors.

Beyond determining whether someone gets approved for a credit card, a credit score can affect what interest rate and what spending limit are offered.

The new method is being implemented later this year by VantageScore, a company created by the credit bureaus Experian, TransUnion and Equifax. It’s not as well known as Fair Isaac Corp., whose FICO score is used for the vast majority of mortgages. But VantageScore handled 8 billion account applications last year, so if you applied for a credit card, that score was likely used to approve or deny you.

Using what’s known as trended data is the biggest change. The phrase means credit scores will take into account the trajectory of a borrower’s debts on a month-to-month basis. So a person who is paying down debt is now likely to be scored better than a person who is making minimum monthly payments but has been slowly accumulating credit card debt.

“This is a really big deal,” said John Ulzheimer, an expert in credit reports and credit scoring. Ulzheimer said taking trended data into account has long been considered by the credit scoring industry, but hasn’t been implemented on a meaningful scale. He expects more lenders to adopt it.

People with high credit scores may be affected the most, since the goal of trended data is to see warning signs long before a borrower actually gets into serious trouble.

“When it comes to prime borrowers, you may not have bad behavior on your credit file, but a trajectory provides very powerful information,” said Sarah Davies, senior vice president for research, analytics and product development at VantageScore.

The change also shakes up the maxim that had people keeping open accounts they’d opened long ago. An important metric in calculating credit scores has been the portion of their available credit people are actually using. A person with $5,000 in credit card debt with a $50,000 limit across several cards could score better than someone with $2,000 in debt on a $10,000 limit because of that ratio.

But VantageScore will now mark a borrower negatively for having excessively large credit card limits, on the theory that the person could run up high credit card debt quickly. Those who have prime credit scores may be hurt the most, since they are most likely to have multiple cards open. But those who like to play the credit card rewards program points game could be affected as well.

Taking civil judgments, medical debts and tax liens out of the equation comes after a 2015 agreement between the three credit bureaus and 31 state attorneys general. The argument was that civil judgments and tax liens – which can significantly hurt a person’s credit report before there was time for insurance to reimburse.

People with those items on their credit report now can see a bump of as much as 20 points. But it won’t help much if they also have negative marks like delinquencies and debts that have gone to collection.

Mortgages, though, won’t be affected. The government-owned mortgage companies Fannie Mae and Freddie Mac require FICO scores for eligibility. Because of their outsized influence on the market, few mortgage lenders use VantageScore.

Do You Have Questions About Your Credit? Contact Us Today!

Bill Spragg at 281 804 3333 or bspragg@Lcanow.com

or

Harry Bradley at 713 419 7151 or hbradley@Lcanow.com

Interesting Equifax History

Equifax is the oldest and largest credit bureau in existence today. They were originally founded in 1898, 70 years before the creation of Trans Union.

Two brothers, Cator and Guy Woolford, created the company. Cator actually got the idea from his grocery business, where they collected customers’ names and evidence of credit worthiness. He then sold that list to other merchants to offset his own business cost.

The success led Cator and his attorney brother, Guy, to Atlanta to start what would become one of the most powerful industries in existence today.

Retail Credit Company was born and local grocers started using the Woolford service, which expanded rapidly. By the early 1900’s the service had expanded from grocers to the insurance industry.

Retail Credit Company continued to grow into one of the largest credit bureaus by the 1960s, with nearly 300 branches in operation. They collected all kinds of consumer data, even rumors about people’s marital lives and  childhood. They were also scrutinized for selling this data to just about anyone who would buy it.

In the late ’60s, Equifax started to compile their data into computers, giving many more companies access to purchase this data. They also continued to purchase many more of their smaller competitors, becoming larger and also attracting the attention of our Federal government.

In response, the US Congress met in 1971, and enacted the Fair Credit Reporting Act. This new law was the first to govern the information credit bureaus and regulate what they are allowed to collect and sell. Equifax was charged with violating this law a few years later and even more government restrictions were implemented.

Equifax was no longer allowed to misrepresent themselves when conducting consumer investigations, and employees were not given bonuses anymore based on the negative information they were collecting, which was standard practice in the past.

It is alleged that due to the tarnished reputation all of this left on Retail Credit Company, they changed their name to Equifax (Equitable Factual Information) shortly after 1979.

Throughout the 1980s, Equifax along with Experian and TransUnion, split up the rest of the smaller credit reporting agencies amongst them, adding 104 of those to Equifax’s portfolio. They then continued to grow, aligning with CSC Credit Services and another 65 additional bureaus.

Equifax has continued to grow, now maintaining over 401 million consumer credit records worldwide. They also expanded their services to direct consumer credit monitoring in 1999.

Today Equifax is based out of Atlanta, Georgia and has employees in 14 countries.

Do You Have Questions About Your Credit?  Call Us Today!

Bill Spragg at 281 804 3333 OR bspragg@Lcanow.com

OR

Harry Bradley at 713 419 7151 OR hbradley@Lcanow.com